Losses due to mortgage defaults and foreclosures and their impact on the markets have prompted policy makers to scrutinize how mortgages are made, packaged into securities and sold to investors. Along with efforts to help borrowers in duress, they are discussing tighter regulations and stronger enforcement of existing rules. The Pennsylvania House has passed a comprehensive legislative and regulatory package to protect consumers from well-known abuses while ensuring the continued availability of capital.

• House Bill 1081 increases oversight of certified real estate appraisers by changing the composition of the State Board of Certified Real Estate Appraisers to include the Attorney General and the Secretary of Banking. The measure also increases membership on the state Board from seven members to 13, one of whom would be a working banker with expertise in the mortgage lending business. Certified appraisers will maintain their majority, with seven members.
• House Bill 1082 permits the Department of Banking to release information on pending enforcement actions and fines after a final order or adjudication by the Secretary of Banking.
• House Bill 1083 improves mortgage oversight and gives the Pennsylvania Housing Finance Agency more flexibility to accept late payments, make compromise mortgage payoffs and set interest rates on loans. The bill also changes the assistance interest rate from 9 percent to a mortgage interest rate established under the Usury Law.
• House Bill 1084 adds interest-rate protections for consumers by increasing the maximum interest cap from $50,000 to $197,000 for residential mortgage loans. The cap is adjusted annually for inflation. The bill also clarifies that certain loans are exempted from the rate cap limit, including loans of more than $197,000 and any mortgage loans for a business.
• House Bill 2179 consolidates licensure requirements for persons engaged in the residential mortgage business, including mortgage originators, brokers, bankers, and loan correspondents, prohibiting them from operating without a license. Mortgage originators are not currently required to be licensed. The legislation makes the Mortgage Brokers & Bankers Act applicable to second mortgages and, thereby, applies the requirements of that act to any kind of lending that uses real property as a security for a loan. H.B. 2179 also, significantly, permits large mortgage firms to devise and implement their own in-house originator licensure education and testing programs under the guidance and approval of the Banking Department.

Updating Laws and Regulations to Protect Consumers

In addition to changing the way the Banking Department does business, it has developed several policy proposals to reform the mortgage marketplace.

A policy statement to define dishonest, fraudulent, unfair, unethical and illegal business practices was sent to mortgage licensees in Pennsylvania.

The Independent Regulatory Review Commission is currently considering a regulation to require all mortgage originators to provide consumers with additional disclosures and to make a reasonable effort to discern a borrower's ability to repay a mortgage loan, based on all its terms and conditions - not just the introductory payment.

Mortgage Market Math

According to RealtyTrac, the leading online marketplace for foreclosure properties, in 2007 there were more than 2.2 million foreclosure filings on nearly 1.3 million properties across the United States.

The same group found that more than 1 percent of all U.S. households were in some stage of foreclosure in 2007--an increase of 58 percent from the previous year.

RealtyTrac reports that Pennsylvania ranked 23rd in the country in total foreclosures reported for January. The state's foreclosure rate of one foreclosure filing for every 3,222 households ranked it 37th among the 50 states.

In 2006, however, according to a PHFA Housing Study, Pennsylvania had the 12th highest prime foreclosure rate in the United States; the subprime foreclosure rate was 15th highest in the United States

For 2005, Pennsylvania's prime foreclosure rate was 9th highest in the nation; the subprime foreclosure rate was 4th highest

Last year, Pennsylvania had 16,379 total properties with foreclosure filings, per RealtyTrac. 13.9 percent of households with a mortgage spend between 30 percent and 39.9 percent of their income on housing; 6.2 percent spend between 40 percent and 49.9 percent; 11 percent spend more than 50 percent.

At year end 2007, the Pennsylvania Department of Banking issued 20 percent fewer mortgage-business-related licenses compared to year end 2006.

California had the highest number of foreclosure filings; Nevada ranked first among all states for foreclosure rates.

Mortgages and the Markets*

Mortgages form the financial underpinnings of the nation's housing market and have allowed more than two-thirds of households to own their own homes.

Traditionally, banks made and held home loans with money from local deposits. But over the last 30 years, the financing for mortgages has increasingly shifted to investors in the bond market.

During the recent real estate boom, with interest rates at historic lows, investors poured trillions of dollars into mortgage securities in search of higher-yielding assets.

Flush times allowed many homeowners to buy homes or tap into the equity of their properties, driving the homeownership rate to its highest level ever, 69 percent. It also helped drive home prices skyward, especially along the coasts and in the Southwest.

Now, however, mortgage defaults and foreclosures are on the rise and the homeownership rate is falling. Some economists and officials expect that up to two million borrowers may lose their homes because they cannot afford to repay or refinance their loans, because home prices are falling or because they face some other financial distress.

The pain will be most severe in lower-income and working-class neighborhoods, but most economists expect the broader economy to suffer as well.

More than 100 mortgage lenders have gone out of business and banks, hedge funds, pension systems and other investors are expected to lose up to $400 billion.

Banks and the financial markets have become more wary of mortgage securities and borrowings costs have risen for all but the safest borrowers and loans.

The value of American residential real estate could fall by up to $4 trillion, or by about 20 percent, economists estimate.

*source - New York Times

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