Barney Frank's House Cleaning


Mortgage brokers and banks making home loans are going to come under increased scrutiny and regulation in legislation making its way through Congress, The Post has learned.
The legislation, being hammered out by House Financial Services Chairman Barney Frank, will, for example, keep mortgage brokers from pocketing additional commissions for steering customers into riskier but higher fee-generating mortgages.
In addition, Frank plans to introduce, by the end of March, the bill, which will make loan originators — and not investors in the collateralized paper — pay for the first losses on subprime loans.
“The kind of lobbying that came from people in the [mortgage] industry was too strong. That’s changed,” Frank said Thursday during a housing speech in Washington.
“We are going to toughen up the liability, but on the securitizer,” he said. “We’re going to have originator [have] liability,” Frank added.
The work by Frank and the chairs of the Financial Services subcommittees amounts to a total overhaul of the $75 billion mortgage rescue plan put forth last week by the Obama administration — a plan that was widely panned.
Frank estimates that the overhaul his committee produces will Frank’s three main goals involve the unregulated mortgage origination and securitization processes. He hopes to have a bill ready by month’s end, which could save taxpayers as much as $3.5 trillion in the coming years, according to a report sent to one subcommittee.
“The kind of lobbying that came from people in the [mortgage] industry was too strong. That’s changed,“ Frank said Thursday during a housing speech in Washington.
The finance panel’s main consumer protection initiatives consist of:
•    Setting standards on mortgage origination, which bans additional commissions for a broker to steer someone into a loan to generate higher fees.
•    Mortgage originators and underwriters are subject to first losses on borrower defaults on subprime loans, not investors.
Frank’s overhaul of the plan announced by Treasury Secretary Tim Geithner aims to shield the hedge funds and money managers who purchase the securitized mortgages in the future from the risky behavior of the banks that package the paper.
The bundler of the investment paper must make a good-faith effort to ensure investors that the notes comply with the new regulations, under the measure being worked up by Frank’s panel.
The securitizer will take the first loss on bad derivatives, he said.
Another aspect of Geithner’s plan that is being questioned by lawmakers involves the house-appraisal mechanism the White House proposed using to modify existing troubled loans.
In the run-up to creating the subprime nightmare, the unregulated assessment process used the Broker Price Opinions (BPO), which uses comparable sales but has built-in biases. Among those, appraisals tend to be high because brokers don’t earn a commission if a mortgage is unfunded because of a low assessment.
Also, the Automated Value Model (AVM), which relies on comparable sales, uses a computer algorithm to come up with a final assessment.
“Appraisal independence is of great importance to all homebuyers and homeowners who own or want to own a home. I have therefore fought to improve appraisal independence for many years and I am continuing to do so. Next week, the Housing Subcommittee will hold a hearing to address mortgage modifications, and I expect that home valuations will be discussed,” said Rep. Paul Kanjorski (D-PA), a ranking member on the Finance Committee.
According to mortgage industry sources, the Obama administration is planning to rely on these two models to rescue homeowners from foreclosure.
According to RealtyTrac, foreclosure filings in the US climbed 30 percent in February.
“In the lead-up of the housing bubble, it seems that appraisal values didn’t always match the underlying housing value,” it said.
“Going forward, reforming the appraisal process to prevent inflated pricing will be critical to ensure we don’t repeat the mistakes of the past,” said Rep. Carolyn B. Maloney.
“I’m working as a senior member of the House Financial Services Committee to reform our nation’s mortgage laws to require sound underwriting and appropriate consumer protections.”
“These two models were instrumental in creating the housing bubble,” says James Amorin, president of the Appraisal Institute.
According to a report sent to finance committee members, using these assessment tools could cost Fannie Mae and Freddie Mac $500 billion in potential losses in inflated valuations based on 4 million reworked loans.
In the case of loan servicers, using the AVM or BPO models to reset the existing troubled loans could add a staggering $3 trillion in potential losses to Uncle Sam’s coffers based on the existing 20 million troubled loans, according to the report.
Amorin says the assessment business during the bubble was “The Wild Wild West, without a Sheriff.”

For more on Wall and Washington and the cratering economy see:


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