Transparency for Homeowners Act and Promoting Mortgage Responsibility Act

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.