Lawmakers eye changes in home financing

WASHINGTON - As one of the lawmakers on Capitol Hill with responsibility for navigating the country out of the housing crisis, Rep. Barney Frank is a force to be reckoned with.

So when the Massachusetts Democrat, chairman of the House Financial Services Committee, announces that "the notion of homeownership as the goal universally is greatly flawed," and that an adequate supply of affordable rental housing might have prevented the subprime-mortgage debacle, it well may signal a sea change in the way Americans look at housing once the economy recovers.

Frank will be taking that attitude into summertime deliberations over President Obama's proposals to reform the financial system - legislation designed to prevent a recurrence of the bubble that has burst all over in the last two years.

One of the more important parts of the proposals is "to require that no one ever securitize 100 percent of any loan ever again," Frank told real estate writers and editors yesterday during a meeting in the committee hearing room.

"What's happened in America is that the lending business has been transformed, and that's at the heart of the real estate crisis," he said. "Fifteen years ago, if you had a high tolerance for risk, you bought equities, and if you were conservative, you bought debt. But that got flipped in our society, and debt has gotten more volatile than equity."

Securitization was "very much at the heart of this," Frank said.

"If I am lending you money and I expect you to pay me back, I am bound to need more capital, depending on whom I'm lending to."

Securitizing mortgage debt to raise more capital made this easier, "and that's what led to the bubble," Frank said.

Under the Obama proposals, Frank said, mortgage brokers first must offer "plain-vanilla mortgages" to consumers, and then the borrowers themselves can decide whether they want to pursue other financing, such as adjustable-rate mortgages.

"That puts the burden on the consumer," he said. "Remember, the problem in the subprime market is that borrowers who really did qualify for prime loans were sold subprime loans instead. We want to stop that practice."

Rep. Paul E. Kanjorski (D., Pa.), chairman of the Financial Services subcommittee on capital markets, insurance and government-sponsored enterprises, said it was important "to take everything one step at a time."

"One of the major problems is that we have taken a bipartisan approach to the crisis so few times, and we need both sides of the aisle to agree on these changes," said Kanjorski, whose district includes the Wilkes-Barre/Scranton area.

"Until we get the real estate market stabilized, we can't go forward," he said. "The next six months will be crucial. . . . If you remove the tourniquet, the blood will start flowing even faster than before," especially with growing unemployment.

Not everyone on Capitol Hill is enamored of Obama's proposals. Sen. Christopher "Kit" Bond (R., Mo.), a member of the Appropriations Committee, said the growing dependence on what he called the Federal Housing Administration "powercade" could create an even bigger financial crisis.

"The FHA has long been a major problem, with inadequate staff and technology . . . that hasn't changed since the 1970s," Bond said. "Still, FHA's share of mortgages has increased from $59 billion to $180 billion in the last year, and home sales, minus refinancing, have increased from 6 percent to 20 percent of the total."

Bond said he would do everything he could to get the FHA what it needed in return for "more skin in the game" - down payments higher than the current 3.5 percent.

"More skin in the game seems to have a wonderful, cleansing effect on regulations," he said.