Leading Democrat proposes mortgage reform

By Patrick Rucker

WASHINGTON (Reuters) - U.S. mortgage lenders, brokers and investors would be bound by a new set of consumer protection rules under legislation introduced on Monday by the chairman of the House Financial Services Committee.

During the recent housing boom, Wall Street bundled billions of dollars worth of home loans into securities for investors while lenders offered credit to subprime borrowers who might have typically been turned down for a loan.

Democratic Rep. Barney Frank of Massachusetts said his legislation would give mortgage securitizers some responsibility for improper loans that go bad and eliminate some broker incentives that could lead borrowers to costlier loans.

The language of the bill would require "a mortgage originator to act solely in the best interest of the consumer, including finding the residential mortgage loan that best meets the needs of the borrower." The legislation would prohibit brokers and lenders from steering borrowers toward high cost loans.

While many lawmakers have sketched their own version of mortgage reform, Frank's bill will likely serve as an important blueprint since he leads the key committee.

On a subject crucial to investors, Frank said his bill will give "some responsibility to the syndicator" of mortgage securities but not the investor who buys them.

"The securitizers will be liable if they package loans that should not have been made in the first place," Frank said in a conference call with reporters.

Some industry groups have warned that holding investors liable for troubled loans might send them fleeing from the home loan market and so raise borrowing costs.

Frank's plan would give securitizers 90 days to adjust improper loans and give them protections if they make good-faith efforts to ensure the loans are proper.

Frank said he hopes to see the bill pass the House before the end of the year.

While the lawmaker said his plan would improve mortgage lending practices going forward, it will do little to aid borrowers now in danger of losing their homes.

Two million home loans will see their interest rate spike by the end of 2008 and about 500,000 of those homes will face foreclosure, according to research from the Department of Housing and Urban Development.

"There is a contagion from neighborhoods where properties are losing value to Wall Street where the market for these loans is suffering," said John Taylor, president of the National Community Reinvestment Coalition, who is calling for the federal government and the mortgage industry to set up a clearinghouse for borrower aid.