Some lawmakers warn against the dangers of over-regulation
WASHINGTON — Congress is looking at potential reforms to risky home lending practices, although a House subcommittee hearing last week suggests lawmakers are still sorting out the complex workings of the mortgage market and wondering whether reforms will be necessary or helpful.
With the number of foreclosures nationally jumping 47 percent in March from a year ago, lawmakers are weighing whether new lending rules are needed or whether the market is already in the process of self-correcting. The task of crafting reforms is made more complicated by the long list of players involved in mortgage transactions.
The mortgage industry, in general, has argued that reform could restrict lending in the near term, hurting low-income borrowers — the intended beneficiaries.
Big financial institutions and Wall Street investment firms have in recent years increasingly bought home loans in bulk from banks and other lenders and bundled them into securities to be sold to investors, theoretically spreading risk and helping provide more funds for lending.
Critics say the creation of this secondary market in mortgages caused housing lenders to be too lenient in evaluating high-risk or subprime borrowers. Consumer advocates say investors in bundled or pooled mortgages should be held legally accountable for encouraging lax lending practices.
But industry representatives say investors, who had no direct role in loan approvals, can’t be held legally responsible for creating excesses in subprime lending.
Several lawmakers warned against overzealous reform efforts, citing Georgia’s experience as a textbook case. A predatory lending law was enacted in the state in the fall of 2002 that allowed borrowers to seek punitive damages from anyone who bought a loan or a security that included the loan.
In response, the three major credit-rating agencies decided they would no longer rate the credit quality of securities containing Georgia home loans. (AP)
