Obama pushes for less risky home loans

The Obama administration faces a tough fight over its financial overhaul plan. Powerful trade groups like the American Bankers Association, for example, oppose creating a consumer financial protection agency. Even lobbying groups open to the idea of a consumer-products regulator question whether the government should suggest which mortgages are best for consumers.

"We don't want to stifle innovation, and we don't want to stifle competition," said John Courson, president of the Mortgage Bankers Association.

Traditional fixed-rate loans fell out of favor during the housing boom. They dropped from a 75 percent market share in 2002 and 2003 to around 50 percent in 2004 and 2005, according to Inside Mortgage Finance. But with the housing bubble burst and mortgage rates near historic lows, fixed-rate loans — 30-year, 15-year and other types — now account for about 95 percent of the market.

Previous efforts in Congress to crack down on mortgage abuses have fallen short. Even regulatory proposals on seemingly simple issues, like reducing the paperwork to get a loan, have devolved into battles among industry factions.

Supporters say a new consumer regulator is sorely needed. They point to academic research suggesting that consumers, faced with a difficult choice about their personal finances, tend to choose the path of least resistance. As a result, they often make poor decisions.

That's particularly true with mortgages, which require signing numerous complex documents. Many borrowers say they didn't understand the loans they signed up for during the housing boom. Some say they were surprised when their rates adjusted to much higher payments.

"These loans are so complicated that the consumers can't figure out what's going on," said Bill Apgar, senior adviser for mortgage finance at the Department of Housing and Urban Development.

The Obama plan includes other elements likely to produce drawn-out lobbying fights. For example, administration officials want to curb the fees that brokers and lenders receive tied to inflated mortgage rates.

Brokers argue such fees are a legitimate way for borrowers to afford a loan without having to come up with thousands of dollars in closing costs, because the fees can be spread over the life of a loan. They also intend to fight a plan to have their compensation linked to whether a borrower winds up defaulting.

"There's no reason that we should have to assume that risk," said Marc Savitt, president of the National Association of Mortgage Brokers. He argues that brokers merely submit loans to lenders and don't influence whether the loans are approved.

Brokers have already seen their market share dwindle, from more than 60 percent of new loans at the peak of the market to less than 20 percent now, said David Olson, president of Access Mortgage Research in Columbia, Md.

If mortgage broker fees were eliminated, "that would be the complete kiss of death" for mortgage brokers, Olson said. "That's really how they make their money."

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