Obama pushes for less risky home loans

updated 4:23 p.m. ET June 21, 2009

WASHINGTON - If President Barack Obama gets his way, consumers who take out mortgages would automatically get a "plain vanilla" loan — such as a traditional 30-year fixed-rate mortgage — unless they opted for a riskier variety.

Obama's plan to revamp financial regulation aims to protect borrowers from the confusing and high-risk mortgages that fed a pandemic of delinquencies and foreclosures, led to the worst financial crisis in decades and thrust the nation into a deep recession.

Obama is expecting opposition to the plan, and cautioned Saturday in his radio address, "While I'm not spoiling for a fight, I'm ready for one."

Government officials want to make the process of getting a mortgage as simple and abuse-free as signing up for a retirement savings plan: A growing number of companies now automatically enroll new employees in 401(k) plans unless they opt out.

For mortgage brokers, though, the plan threatens to shrink the fee income some have received from encouraging the use of adjustable-rate, interest-only and other sometimes risky loans.

Obama's plan to overhaul financial regulation, unveiled last week, would create a Consumer Financial Protection Agency to monitor consumer financial products and revamp the entire home-loan process.

It's the administration's latest step to tackle the aftermath of the housing bust. The administration in March launched a $50 billion plan to give the lending industry financial incentives to modify mortgages to lower payments.

But that plan is off to a slow start. Many housing counselors say it hasn't made much of a difference nationwide because lenders have been slow or reluctant to cooperate. As of mid-June, about 50,000 borrowers were enrolled in three-month trial modifications under the plan, according to the Treasury Department. The administration initially had said up to 4 million households could be helped.

Critics in the mortgage industry are denouncing Obama's plan for government-approved mortgages. Some call it a paternalistic intrusion that would restrict borrowers' options and make loans harder to get and potentially more expensive.

Guy Cecala, publisher of Inside Mortgage Finance, a trade publication, called the idea "un-American." He said it would make the U.S. mortgage market heavily regulated, like those of Germany or France, where consumers have fewer options.

"We're a free-enterprise country," Cecala said. "We encourage innovation. This is certainly not going to encourage innovation. It will stifle it."

But others in the industry are open to the idea. A good mortgage broker should always show a borrower plenty of options, including the traditional 30-year fixed-rate loan, and explain the risks clearly, said Kevin Iverson, a mortgage broker with Reed Mortgage Corp. in Denver.

During the lending boom, unscrupulous brokers "were selling bad products because it was one of the ways people made more money," Iverson said. They focused on closing deals fast, he said, rather than building customer relationships that would endure for years.

If the Obama plan for simplifying the mortgage process is approved, here's how it might work:

The government would give its seal of approval to a handful of mortgage types — a standard 30-year fixed-rate mortgage and perhaps a few varieties of adjustable-rate loans. For a loan to get the "vanilla" label, the lender would have to verify borrowers' income and have them set aside money for property tax and insurance.

Borrowers would still be able to get mortgages that don't pass the government's vanilla test. But they would be warned about the risks.

MORE FROM TECHNOLOGY & MONEY

Technology & Money Section Front

Dad lost his job, so this family lives on the road Living on the road full-time: Is it right for you? Do you need a mini money makeover?   Insider shares shopping secrets   Ford unveils inflatable seat belts   Experts offer financial advice Recession over? Readers don't believe it   How to deal with rising credit card rates   U.K. gets tough on distracted drivers   College dorms get an upgrade Technology & Money Section Front   Add Technology & Money headlines to your news reader: