WASHINGTON - In a big setback for the mortgage industry, the Clinton administration is backing legislation that would require lenders to pay interest on escrow accounts.

In a letter dated Nov. 9, Henry Cisneros, secretary of Housing and Urban Development, told the bill's sponsor, House Banking Committee Chairman Henry Gonzalez, D-Tex., that the department "strongly supports the goals of the legislation."

The administration's support for the bill gives new political cover to members who might have been reluctant to further regulate the industry, one House aide said. They can now argue "even the experts agree it should happen."

"It's better than an even-money bet that this will be the law of the land," added Chris Lewis of the Consumer Federation of America.

The proposed bill, heavily opposed by the mortgage industry, would require lenders to pay escrow interest equal to the passbook savings rate. Currently, only 14 states require interest on escrows, which are set up to pay homeowners' property tax and insurance bills.

The average passbook rate is 2.29%, according to an October survey of 100 large banks and thrifts conducted by Bank Rate Monitor.

Mortgage banking leaders claim the proposal would sharply reduce the profitability of mortgage servicing and force lenders to raise the fees they charge borrowers.

"I think the secretary is well intentioned, but misguided" in supporting Rep. Gonzalez's bill, said Warren Lasko, executive vice president of the Mortgage Bankers Association.

Nonetheless, he said, Mr. Cisneros' move "enhances the chance of the bill being enacted."

Contains Opt-Out Provision

The interest requirement would apply only to escrow accounts set up after the bill took effect. And borrowers could opt out of maintaining an escrow account once they built 20% equity in their property.

In his letter, Mr. Cisneros gave unqualified support to the interest proposal, but was more guarded in his support of the opt-out provision.

Industry experts, meanwhile, said the bill could have sweeping effects.

|A Pay-Me-Now or Pay-Me-Later Proposition'

Interest payments would depress the value of servicing rights by 25% to 40%, said Hunter Wolcott, president of Reserve Financial Management in Miami. And mortgage bankers would make up that loss by imposing higher fees when the loans were originated, he said.

"It's strictly a pay-me-now or pay-me-later proposition. Either the borrower pays in the form of fees at closing, which is the post-Gonzalez [scenario], or the mortgage banker waives up-front fees in expectation of future value," Mr. Wolcott. said.

The bill will likely be a part of housing reauthorization legislation next year. A Senate aide said that the Senate will definitely have to consider the proposal next year, now that the administration supports it.

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