Dems take on mortgage meltdown

NEW YORK (CNNMoney.com) -- In the wake of the subprime mess, Democratic presidential candidates are grabbing hold of the issue and offering their own solutions. And the problem, according to many of them, lies with the mortgage broker.

Sen. Barack Obama has introduced legislation targeting fraud and predatory lending. John Edwards, the former senator from North Carolina, has said he wants to ban certain fees, establish uniform broker licensing standards and start a national database for disciplinary infractions.

Senator Hillary Clinton (D-NY)

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Mortgage Meltdown: 2007 Mortgage Resets: Record bill due Billions in subprime ARMs will be subject to higher payments. (more) Hardest hit zip codes Foreclosure clusters are on the move from industrial centers to coastal and southern states. (more) Jumbo rates on the rise Financing a home in some of the nation's priciest areas just got more expensive. (more)

Last week, Sen. Hillary Clinton came out with a plan to address lending abuses. One of its main policy planks was to "crack down on unscrupulous brokers."

The National Association of Mortgage Brokers (NAMB) reacted to Clinton's statement immediately, criticizing her for singling out small business owners and calling for a wider scrutiny.

"The entire mortgage system needs to be examined from stem to stern," the NAMB said in a statement, "from the home shopping phase, bankers, brokers, and lenders, all the way to Wall Street and the rating agencies."

Brad Inman, publisher of Inman News, an on-line chronicler of the real estate industry, said, "I find it odd that mortgage brokers would carry the weight of blame for this entire web of sins."

According to Inman, the loans originated by brokers wouldn't have been offered to consumers if Wall Street wasn't ready to buy them to sell on the secondary markets.

"Wholesalers, originators, everybody was using mortgage brokers." Inman said, "They're great vehicles for moving these kinds of loan products."

Clinton also called for a national registry of mortgage originators. The NAMB agreed with her, but said such a registry should include all originators, not just brokers.

"We believe Senator Clinton is on the right track," said Joe Falk, Legislative Committee Chair for the NAMB. "Our concern is that it doesn't include all the parties - unlicensed creditors, credit unions, state-chartered banks."

A day after Clinton presented her proposals, presidential hopeful Sen. Christopher Dodd released his plan on how to reform the mortgage lending industry.

As head of the Senate Banking Committee, Dodd has been more out front of the issue than other candidates, leading several hearings to investigate the subprime mortgage crisis.

He wants to stop mortgage brokers from getting paid more when their clients choose loans with higher interest rates than necessary. "This perverse incentive to overcharge home buyers should be prohibited," he said in a statement on his Web site.

But according to Falk, this use of what's called the "yield spread premium" is simply a method used to compensate mortgage brokers. "All originators earn some form of compensation and they all should be treated the same," he said.

Dodd also pointed out that many brokers give clients the false impression they're working on their behalf.

"Brokers should have to act either as agents of the borrower, thereby owing them a fiduciary duty, or as agents of the lenders, who would be responsible for the brokers' sales practices," he said.

He also addressed other industry practices that are not the sole responsibility of mortgage brokers. He wants to:

• End prepayment penalties - the fees paid if a borrower chooses to pay off a mortgage early.
• Tighten underwriting standards so that borrowers are judged on their ability to repay the loan at fully indexed rates rather than at low teaser rates.
• Require lenders to escrow for taxes and insurance and disclose those expenses to borrowers; and
• Cut down loans that require little or no documentation proving a borrowers' assets or income - the so-called "liar loans."

The NAMB supports escrow requirements on subprime loans with loan-to-value ratios above 80 percent, according to Falk, as well as some restrictions on no-doc loans.

But it breaks with Dodd on a complete prohibition of prepayment penalties. Falk said, "We do believe that prepayment penalties should [come with] some consumer benefit, such as a reduced rate."

With news on mortgage woes seeming to worsen almost daily, voters can expect more presidential hopefuls to weigh in with more extensive plans - maybe even from the Republican candidates. So far, they've been largely silent on the issue.