Transparency for Homeowners Act and Promoting Mortgage Responsibility Act

Mr. Merkley:

Mr. President, I am introducing two pieces of
legislation to address the very heart of our economic crisis–the housing
market and the deceptive lending practices that have placed millions of homes
at risk of foreclosure.

In the last few years, millions of families were led into
unsustainable home mortgages that pushed our country into an economic crisis
unprecedented in our lifetimes. Instead of fulfilling a dream and contributing
to a secure financial future, home mortgages have too often become a check for
stripping wealth from working Americans.

These two bills, the Transparency for Homeowners Act, S.
911, and the Promoting Mortgage Responsibility Act, S. 912, will put an end to
deceptive and unfair mortgage practices that played a pivotal role in tricking
American families to accept risky and unsustainable mortgages.

Two key factors drew families into these mortgages that
paved the way for this recession. First, steering payments.

Steering payments were paid to brokers who enticed
unsuspecting homeowners into deceptive and expensive mortgages. These secret
bonus payments, often called yield spread premiums, turned home mortgages into
a scam. A family would go to a mortgage broker to get advice in getting the
best possible loan. The family would trust the broker to give advice because,
quite frankly, they were paying the broker for that service. But what the
borrower did not realize is that the broker would earn thousands of bonus
dollars from the lender if the broker could convince the homeowner to take out
a high-priced mortgage, such as one with an exploding interest rate, rather
than a plain vanilla 30-year fixed rate mortgage.

The second factor is prepayment penalties. Prepayment
penalties added insult to injury. After the homeowners realized they had been
steered into an unsustainable mortgage, they soon discovered that a large
prepayment penalty made it too costly for them to refinance to a more
affordable loan. They were locked into that first destructive loan they did not
fully understand when it was presented.

This scam has had a tremendous impact. A study for the Wall
Street Journal found that 61 percent of the subprime loans that originated in
2006–that is 61 percent that originated in 2006–went to families who
qualified for prime loans. More than half the borrowers who qualified for a
prime loan ended up with a subprime loan because of these steering payments,
putting millions of American families at risk. This is simply wrong–a publicly
regulated process designed to create a relationship of trust between families
and brokers but that leaves borrowers unaware of payments that take place,
putting them into expensive and destructive mortgages.

I call your attention to a New York Times editorial
published on April 9 entitled “Predatory Brokers.” This editorial highlighted
the problem. The Times concluded that:

“The first step must be to outlaw the kickbacks that lenders
pay brokers for steering clients into costlier loans.”

The editorial went on to say that:

“The most clearly unethical form of payment is the so-called
yield-spread premium.”

My friends, it is difficult to overstate the damage that has
been done by these practices. An estimated 20,000 Oregon families will lose
their homes to foreclosure in 2009. Nationwide, an estimated 2 million families
will lose their homes this year. And the total of foreclosed families is
predicted to reach 9 million by 2012.

The legislative solutions I propose are very simple. The
bills I am introducing today will ensure these practices do not again haunt the
mortgage business in America. First, the Transparency For Homeowners Act ends
the secret steering payments to lenders who lead homeowners into deceptive
mortgages they cannot afford over the long term. Second, the Promoting Mortgage
Responsibility Act prohibits lenders from issuing costly financial penalties
that prevent homeowners from refinancing into a more affordable loan.

 It is simple: an end
to steering payments and an end to prepayment penalties. We should recognize
that not only have these practices damaged the financial foundations for our
families and millions of families at the retail level–turning the American
dream of home ownership into an American nightmare–but these practices, which
resulted in a huge surge in subprime lending, set the stage for the disaster
that would come and is still unfolding on Wall Street and crippling economies
around the world.

My legislation will restore transparency to the mortgage
lending process and help make home ownership a stable investment for families
once again. The time has come for us to make sure that secret steering payments
and paralyzing prepayment penalties never again haunt American families. Let us
restore the American dream of home ownership.