Banks fight law regulating risky lending

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Even though the U.S. economy has continued its slow rise toward recovery, the housing market remains sunk. Over two million Americans have been subject to foreclosure this past year while pending foreclosures are at an all-time high. Despite the burst housing bubble and federal crackdowns, mortgage banks still want to continue the risky lending that contributed to the crisis.

In the midst of the national housing crisis, the Dodd-Frank bill, which passed Congress last year, seemed to be a glimmer of hope for homeowners. The bill, also known as the Wall Street Reform and Consumer Protection Act, requires some seemingly common sense practices for lenders such as ensuring people can repay a loan, keeping loan fees below three percent, keeping payments at a reasonable percentage of the borrower’s income, among many other provisions designed to keep homeowners safe.

But the banks find these requirements to be too stringent. Before the housing market collapsed, the banks made high profits off of two main practices now regulated by the Dodd-Frank bill: origination fees and selling mortgages to Wall Street in the form of securities.

Before the Dodd-Frank bill, origination fees, or the price for the bank to help a borrower, could be placed as high as six percent of the total loan — an amount when tacked on to the total often became too expensive for borrowers to pay. According to the Federal Housing Administration, loans with three to six percent origination fees were more likely to end up in default.

By selling the mortgages to Wall Street investors, banks no longer had to be responsible for defaulted loans.

“It was all about originating loans that were extremely profitable to bankers and then they sold them in pools to investors known as securitizations,” said Gretchen Morgensen, business correspondent for The New York Times. “So there was no accountability in that assembly line. It was more about volume rather than quality.”

If the Dodd-Frank bill comes under attack, the Obama administration’s Home Affordable Modification Program, or HAMP, should help alleviate the troubles of homeowners. HAMP encourages banks to adjust loans for borrowers by dealing with sub-prime mortgages and interest rates. But the plan was not designed to deal with borrowers who have safe loans, but lost their jobs or so their homes lose equity. Jodi Woodsmith, a foreclosure counselor, notes that this program may have good intentions but it doesn’t do enough to protect borrowers.

“HAMP is not keeping up with the changes in the economy,” Woodsmith said. “HAMP needs to be a law and not a contractual agreement. It needs some teeth that allow homeowners to sue for violations, and it needs fines for servicers who don’t cooperate.”

As the banks lobby for the new legislation to change, Morgensen worries that homeowners will lose the protections of the Dodd-Frank bill.

“Unfortunately the monied interests in Washington are so powerful and the average person just doesn’t have that kind of advocacy,” Morgensen said. “So we can only hope that regulators really understand the importance of the rules.”

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