(c) 2008 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.The proposed overhaul of the nation's financial regulation calls for better coordination of the many federal and state agencies that oversee home-mortgage lending. But mortgage regulation would remain a patchwork affair, with no single agency in charge.
During the housing boom, this patchwork system allowed states, in some cases, to crack down on abuses that federal regulators overlooked or played down. But it also slowed the federal response to lenders' increasingly lax standards for granting loans and the resulting surge in defaults by homeowners, which helped give rise to the current credit crunch.
In a plan scheduled to be officially released Monday, the Treasury proposes to remedy "gaps" in mortgage oversight by creating a federal Mortgage Origination Commission run by a six-person board composed of representatives of the Federal Reserve and five other agencies involved in banking regulation. The commission would develop minimum standards for state licensing of individuals and companies involved in mortgage lending. It also would rate each state's system of regulating mortgage brokers and lenders.
The Mortgage Bankers Association and the National Association of Mortgage Brokers, both industry trade groups, expressed support for the broad outlines of the proposal and said they were eager for more details.
The idea is to "let the states continue to be responsible for regulation," Treasury Secretary Henry Paulson said in an interview Saturday, "but [the commission] would evaluate them . . . For states with deficient oversight, I would be willing to bet people wouldn't want to put those mortgages" into securities sold to investors. The authority to draft regulations under national mortgage laws would remain with the Fed. But states would be given "clear authority to enforce federal mortgage laws," according to the Treasury plan.
During the housing boom, the Fed was reluctant to use its rule- making powers to the extent some consumer advocates wanted to crack down on lending practices, including the proliferation of subprime loans, or those to people with weak credit records. Fed officials said that cracking down too hard might choke off the supply of credit and that the market could sort out most of its own problems.
Since the Treasury plan would keep the Fed in its central rule- making role, "it's safe to say that if this regulatory framework had been in place years ago, it would not have prevented the current mortgage-market meltdown," said Thomas Lawler, a housing economist in Leesburg, Va., pointing to the central bank's relaxed approach as subprime lending surged from 2002 through 2005.
By late 2005, the Fed and other regulators set to work on stiffening rules on mortgages that start with relatively low payments but leave borrowers vulnerable to much higher ones later. Drafting those rules required negotiations among five agencies: the Fed, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the National Credit Union Association.
The regulators completed their first set of tighter mortgage-lending standards only in September 2006 and a second set, governing subprime loans, in June 2007 -- after many subprime lenders had collapsed.
Some of the largest subprime lenders, such as Ameriquest Mortgage Co. of Orange, Calif., weren't deposit-taking institutions subject to federal banking regulation. In 2005, a large group of state regulators banded together to investigate allegations of lending abuses by Ameriquest. The states charged that Ameriquest in some cases inadequately disclosed loan terms, urged appraisers to inflate estimates of home values and encouraged borrowers to lie about their incomes to qualify for loans.
Ameriquest settled those charges in January 2006 by agreeing to pay $325 million in fines and change some of its practices.
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Damian Paletta contributed to this article.
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