Mortgage Crisis

Subprime solutions


To hear the pundits and politicians tell it, the mortgage industry is a monster-sized production of The Sting: Fiendish brokers are giving homeowners loans they can't pay back, while predatory lenders are fleecing poor saps who bought adjustable-rate mortgages. In response, House Financial Services Committee Chairman Barney Frank (D-Mass.) proposed the Mortgage Reform and Anti-Predatory Lending Act of 2007, which would transform the way the mortgage business works.

For the first time, the bill attaches liability to "securitizers" who underwrite mortgages and sell interest in home mortgage loans. It permits judges to rewrite loan terms, ostensibly to help homeowners who have made a bad deal. Perhaps most importantly, it asks lenders to assess whether a borrower can pay back a loan, and to deny it if they decide he can't. "People should not be lent money beyond what they can be expected to pay back," Frank told reporters.

These are drastic changes for an industry that boomed before the market started to teeter from the continuing subprime scare. By requiring licenses for brokers and cutting down on the number of mortgages, the bill would start shrinking the industry. Some Republicans warn that the onus on companies to prove their borrowers' wealth would limit homeowners' choices. "Who are we to say no?" asked Rep. Jeb Hensarling (R-Texas).

But in early November, the senior Republican on Frank's committee told his peers to buck up and support the bill. "Not all of you will be able to support it," Rep. Spencer Bachus (R-Ala.) said in a memo. "While I respect that point of view and the philosophical principles that inform it…it is important that Republicans be for something." On November 15, the House approved the bill 291-127. At press time, it's stalled in the Senate.