Last week a mortgage reform bill was introduced by the House financial services committee fronted by Chairman Barney Frank and it has real estate and banking groups talking about it at great length, both negatively and positively.
Supporters feel that, had it been Federal law during the housing boom between 2002 and 2003, the bill would have prevented the mortgage lending excesses leading to today's financial crisis, including the lending practices of no-documentation, zero down payments and negative amortization.
The bill is expected to pass the House fairly easily this month and then it will go before the Senate in May, and, if passed, it would change home mortgage lending fundamentally down the road.
The bill is designed to discourage lenders from making anything other than regular 30-year fixed rate mortgages coupled with full documentation and strict underwriting.
It will further require lenders that make other types of loans, posses at least a 5% ownership share of the loan for its full term, even if the loan gets sold into a secondary mortgage bond market later on.
If the loan goes bad and is not paid, the original lender would take a part of the loss, not like it is today where they can just sell the bad loans and write them off.
It's understood that making small and mid-sized mortgage companies cover potential losses would possibly put them in a financial bind.
The bill would also prohibit any loan officers from receiving any compensation that may be tied to the terms of the mortgage and/or its interest rate. Between 2002 and 2003 mortgage brokers were regularly paid larger fees for closing loans with higher-rates as well as riskier mortgages.
The bill also has an addendum that will, by law, require lenders to make sure that mortgages are suitable for the borrowers based on income and the ability to repay the loan.
Furthermore, the bill would ensure that homeowners could not refinance an existing loan unless the replacement loan would benefit them financially more so than their current loan.
This bill is still a work in progress and may change as it goes through Congress, but overall it is hoped that this bill will help prevent our current financial situation from occurring again in the future.