May 12, 2010 / 2:56 PM / 9 years ago

UPDATE 1-Senate votes to bar mortgage kickbacks, liar loans

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WASHINGTON, May 12 (Reuters) - The U.S. Senate on Wednesday voted to end mortgage kickbacks and so-called “liar loans,” two lending practices that played a role in the meltdown of the subprime mortgage market.

By a 63-36 vote, the Senate adopted a measure that would prohibit mortgage lenders from offering incentives to brokers who steer customers into more-expensive loans.

The amendment, which was added to a sweeping rewrite of financial regulations, also would end “liar loans” by requiring lenders to verify that borrowers have enough income to repay their mortgages.

Both practices led to a proliferation of shaky mortgages in the years before the subprime meltdown, which led to the worst recession in 70 years.

Liar loans allowed consumers to qualify for loans that they could not possibly repay. In exchange for a slightly higher interest rate, borrowers could opt to simply state their income or other assets rather than waiting for lenders to verify them.

Such incentives, known as “yield spread premiums,” averaged nearly $1,900 per transaction and could be found in 85 percent to 90 percent of all loans originated by brokers in the years before the subprime crisis, according to a Harvard University study.

Some borrowers were steered into risky, high-interest subprime loans even if their credit was good. BasePoint Analytics, a company that moitors real-estate fraud, estimates that 14 percent of subprime borrowers could have qualified for a regular loan with more favorable terms.

Reporting by Andy Sullivan; Editing by Bill Trott

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