House mortgage bill doesn't offer bailout
By Holden Lewis • Bankrate.com

The House of Representatives has passed a mortgage reform bill that is as remarkable for what it doesn't do as for what it does. It doesn't include a bailout of borrowers or lenders.

The Mortgage Reform and Anti-Predatory Lending Act of 2007 seeks to prevent borrowers and lenders from making dumb choices. It doesn't help troubled borrowers and lenders who made poor decisions in the past.

The bill "cannot undo what happened, but it makes it much less likely that it will happen in the future," Rep. Barney Frank, the measure's architect, said a few hours before the House passed it last week, 291-127. "The fundamental principle of the bill is not to put remedies in place to deal with these problems when they occur, but to stop them from occurring in the first place."

Bursting housing bubbles have exposed bad lending practices. From 2003 until early 2007, mortgage lenders grew ever more lax in their lending decisions. House prices skyrocketed in many markets because nontraditional loans made it possible for buyers to overreach.

The vicious circle
Thus, loose lending led to higher house prices, which led to looser lending, which led to still higher prices. Now the vicious circle is working in reverse: Foreclosures are rising, lenders are tightening their standards, and house prices are dropping. Falling prices encourage lenders to tighten standards more, so fewer would-be borrowers can qualify for loans, which leads to lower house prices. 2007 will be the first year since the Great Depression when average house prices nationally will have fallen, says Lawrence Yun, chief economist for the National Association of Realtors.

Frank, D-Mass., and co-sponsors came up with a bill that tries to arrest any future cycles of loose lending and skyrocketing prices.

Among the provisions:

• Lenders must determine whether the borrower "has a reasonable ability to repay," based upon "verified and documented information." • Mortgage refinances must bestow a "net tangible benefit" to the borrower. • A broker or loan officer may not steer a borrower into a higher-rate loan just to pocket a bigger commission. • On adjustable-rate mortgages, lenders must approve borrowers on their ability to repay the loan after the rate is adjusted upward.