WASHINGTON -
Among the reforms being sought are bringing mortgage brokers, who are responsible for an increasing portion of mortgage originations, into the regulatory scheme.
Many market observers point to brokers, who don't hold mortgages, as a major reason for the failure in the subprime market that is spreading to the rest of the market. The fact that brokers don't hold the mortgages, but just make profits on each mortgage sold, gives them no incentive to ensure that the borrowers have the ability to repay the mortgages, observers say.
Unlike federally insured credit unions and banks, mortgage brokers are largely unregulated.
Several legislative proposals would also bar ties between brokers and borrowers, in order to make sure that brokers are not steering borrowers to favored lenders because of financial incentives.
One measure being sought would allow holders of so-called exploding mortgages, short-term ARMs that require major prepayments if they are refinanced, to get out from under the prepayment penalties.
This is preventing many of those homeowners from refinancing their mortgages at a time their ARMs are ready to "explode" into much higher rates.
Another reform being sought is some kind of assurance that the appraisal process is independent of the lending process. Lawmakers are pointing to over-optimistic appraisals in the face of rising property values, as another reason for the mortgage crisis.
Another proposal will require that all lenders establish escrow accounts to pay property taxes, another flaw in the system being cited because many uneducated borrowers are learning that they don't have enough money left over to pay their taxes after making their mortgage payments.
"This is just one way to really focus on this issue, so borrowers are afforded more protection," Sen. Bob Casey, D-Pa., said of his a bill called the "Borrowers Protection Act," during NAFCU's Congressional Caucus last week.
Barney Frank, the chairman of the House Financial Services Committee, echoed Casey's concerns and said his committee will take up several proposals in the coming weeks aimed at reforming the mortgage market.
Among them will be proposals to expand Fannie Mae's and Freddie Mac's role in the market to increase the amount of mortgages they buy, by, among other things, increasing the limit of conforming mortgages from the current $417,00, to include jumbo mortgages up to $500,000.
Another major reform being proposed would change the tax laws so that homeowners who are foreclosed on would not have to pay federal income taxes on the full amount of debt forgiveness, as they are now.
Carolyn Maloney, the New York Democrat who chairs the Financial Services' Subcommittee on Financial Institutions, said the practice of taxing people on the full amount of debt forgiveness after they have lost their home to foreclosure amounts to double jeopardy.
