UPDATE 1-US Congressional panel passes mortgage reform

Wed Apr 29, 2009 4:30pm EDT

(Adds details, background)

WASHINGTON, April 29 (Reuters) - The top financial panel of the U.S. House of Representatives on Wednesday passed legislation that will increase regulation of the mortgage industry and offer borrowers more protections.

Under the legislation, mortgage finance companies would be forced to hold some default risk and would not be permitted to pass all the costs of failing loans onto Wall Street and investors.

The Financial Services Committee passed a similar measure in 2007 and it was ratified by the House, but a companion bill never cleared the Senate.

Lawmakers have been debating reform of the mortgage finance system since the housing market ended a five-year rise and began to decline in 2006.

The legislation must be ratified by both the House and Senate before it becomes law.

The measure passed the committee with 49 votes in favor and 21 votes against the reform. The bill is expected to go before the full House on May 7, when lawmakers will have another change to propose modifications.

Mortgage lenders will be forced to hold 5 percent of the risk of default under the new legislation. But bank regulators will set the rules for that risk-sharing, Representative Barney Frank, chairman of the committee, told Reuters on Tuesday.

Another provision of the legislation would demand that mortgage refinancing terms provide a "net tangible benefit" to the borrower.

Frank, a Democrat from Massachusetts, said that provision was still a bit unclear but its meaning would be found in the application of the law.

"Is it vague? To some extent, but that's what you do with the law and then they are defined by practice," he said. "In terms of net tangible benefit I would say to the person doing the loan, 'Would you tell your mother to do it?'"

On Thursday, the Senate is expected to debate a separate housing measure that would give bankruptcy judges the power to retool mortgages.

Banks and credit unions have fought hard to stop that measure and Democrats behind the plan have not yet won enough votes to advance the bill, according to a Senate aide close to the negotiations. (Reporting by Patrick Rucker; Editing by Dan Grebler)

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