Congress Launches Proposals In Wake of Subprime Mess.

Congress returned from vacation with a series of proposals that could reconfigure the mortgage market, suggesting lawmakers are in a mood to make substantial changes in the wake of the summer's subprime mess.

Possible bills in both the House and the Senate would expand homeowner protections to cover more high-cost loans, crack down on prepayment penalties and prohibit brokers from steering borrowers toward more-costly loans. Critics blame such practices for encouraging mortgage brokers and lenders to push unsophisticated borrowers to accept loans with onerous terms.

The House version, which has yet to be introduced, could include a more controversial provision that would make buyers of mortgage debt on the secondary market liable for abusive practices by lenders. That provision will face stiff opposition and could chill an already-faltering secondary market.

The common ground between House and Senate Democrats increases the likelihood that Congress will complete some kind of mortgage legislation. The precise details and timing remain hard to predict.

This summer, a growing number of foreclosures and delinquencies among borrowers with subprime and some other types of mortgages led to a freeze in certain sectors of the credit market. Officials have worked to calm jittery financial markets, with limited effect.

Underpinning much of the subprime boom was the rapid growth of a secondary market for mortgages, in which lenders packaged loans as securities and sold them to other investors. That spread the risk among many different players. Critics charged that because liabilities were thinly spread, neither lenders nor investors had enough incentive to make sure loans were sound.

Yesterday, Sen. Christopher Dodd of Connecticut, chairman of the Senate Banking Committee and a candidate for the Democratic presidential nomination, announced plans for an ambitious bill. One key part would ban payments to mortgage brokers known as yield-spread premiums, or YSPs, on subprime loans. Lenders pay YSPs to brokers when borrowers pay a higher interest rate than the best one they could qualify for. Critics say that gives brokers an incentive to push higher-cost loans. The mortgage industry says it can be a way for consumers to compensate brokers without paying upfront fees.

The Dodd plan also would prohibit lenders from giving subprime loans to borrowers who could qualify for prime loans.

This month, several Democrats on the House Financial Services Committee -- Chairman Barney Frank of Massachusetts and North Carolina Reps. Melvin Watt and Brad Miller -- hope to introduce a bill that is likely to mirror Mr. Dodd's approach in many respects. "It's a very hopeful sign," said Mr. Miller.

House Democrats want to address another, more problematic question: whether secondary buyers of mortgage debt should be legally liable for the underlying loans. Democrats acknowledge this is likely to be a sticking point.

Lawmakers say they want to encourage good underwriting practices while being sensitive to industry complaints. Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents national lenders, said that additional liability would increase interest rates by an average of 1.5 to two percentage points.

"One of the arguments we've got against regulation in any way of the secondary market is you will impinge on the market and kill the market," said Mr. Frank. But "giving the investor some assurance of quality in what he or she is being asked to invest in is part of the role of regulation....It can help the market."

Mr. Miller said the legislation would allow secondary lenders to avoid being sued if loans meet criteria such as appearing to comply with the law and avoiding some subprime tactics, such as prepayment penalties.

Indicating the future contours of the debate on this issue, some Republican members said Congress shouldn't rush to judgment.

"The one thing we shouldn't do is rush out and change a market that is working and working well, and brought home ownership to historic highs," said Republican Rep. Spencer Bachus, the ranking member of the House Finance Committee, at a hearing. He said it was "characteristic of this Congress in the past [to] rush to regulation in a crisis, which has left us all with a hangover when it's over."

State legislatures have tried assigning secondary liability in the past, with limited success. Georgia passed a law in 2002 that extended liability to a loan's end buyer, essentially holding them responsible for the actions of underwriters. After mortgage underwriters threatened to leave the state and the major credit-rating concerns said they wouldn't rate pools of mortgages that included Georgia loans, the legislature voted to weaken the liability component in 2003.

A congressional push to add liability to the mortgage market will also likely face resistance from the Bush administration, which has been outspoken about the cost of lawsuits in driving overseas companies from doing business in the U.S.

"A lot of the key details [of the Senate plan] are missing," said Kurt Pfotenhauer, a senior vice president at the Mortgage Bankers Association, a trade group. He agreed that YSPs need to be addressed, because of the potential for abuse, but said it isn't clear that an outright ban is the best solution.

Mr. Pfotenhauer noted that Congress has struggled for years to achieve a consensus on how to combat predatory-lending practices. The issue is very hot now, he noted, because of a surge in defaults and foreclosures. But passing legislation still "isn't a slam dunk," he said.

By James R. Hagerty, Kara Scannell and Sarah Lueck

Is Now a Good Time to buy a House?

I recently wrote about how the mortgage crunch is playing out among homeowners in my area. In response, some readers wanted to know if they should buy a home now or wait in case prices fall lower.

It's not a decision to be taken lightly. Prospective homebuyers who aren't likely to be in their homes long enough to weather the downturn could end up "under water" -- owing more on a mortgage than a home's market value.

My husband Gerry faced a similar decision 16 years ago. He started shopping for homes in early 1991, after the late '80s housing-market implosion. Gerry was sitting on $50,000 in a low-interest savings account and older friends whom he respected were urging him to invest in a house. Prices were still declining from the bust and interest rates on a fixed 30-year mortgage were hovering around 9.5% -- not bad when compared with double-digit rates in the '80s.

Gerry's parents urged him to wait -- they felt home prices would go a lot lower than the $120,000 listed for three-bedroom, one-and-a-half bath homes he had his eye on in our central New Jersey community. Because Gerry was such a diligent saver, he had a substantial down payment and didn't worry so much about being underwater on his mortgage.

We talked it over and despite his parents' concerns, Gerry decided to buy a home. Because he intended to stay put for at least seven years, he decided not to worry about where prices were heading. It worked out: After eight years, when he sold the house to buy his father's home, he walked away with about $75,000 in profit.

So how likely is it that Gerry's scenario will play out for today's would-be home buyers? It's tough to say, since the housing market is facing a downturn that is steeper than we experienced in the early '90s.

Indeed, recent data on the housing market paints a stark picture. Home prices are declining in many regions nationwide. Last month the National Association of Realtors projected, that existing-home sales will fall 6.8% this year, while new-home sales are likely to fall 19%.

At the same time, foreclosures are soaring. According to data provider RealtyTrac, foreclosure filings are up 93% in July from the previous year -- or one foreclosure filing for every 693 households.

Foreclosed homes are hitting many housing markets already saturated with unsold inventory. Inventories of homes for sale in July rose 5.1% to 4.59 million, or about 9.6 months of supply at the current sales pace. A six-month supply of homes for sale is generally the norm in a balanced market.

For homeowners trying to sell, the news is expected to get worse. Wall Street has been burned by bad subprime loans and is curtailing new investment in mortgage lenders. As a result, consumers without stellar credit may be unable to get mortgages at reasonable rates.

All of these factors combined are expected to continue to weigh on home prices.

So what does this all mean for buyers sitting on the fence?

If you're unsure whether you're ready to buy, first consider your outlook. Conventional wisdom says that homeowners who are likely to be in a home for at least seven years will see prices rise. If you're going to want to (or have to) sell the home in the next three years -- when some markets may still be suffering the mortgage mess fallout -- consider renting.

It's true, renting has its own costs. But you won't pay closing costs, real-estate agent fees and myriad other expenses incurred when buying, owning and selling a home. Renting also may allow you to save for a larger down payment, potentially eliminating the need to pay for private mortgage insurance when you're ready to buy. (Get help with the rent vs. buy calculations here.)

If the only way to afford the home you want is to finance it with an adjustable-rate mortgage, I'd be wary of buying now. Some readers over the years have taken me to task for being overly conservative by recommending fixed-rate mortgages. ARMs worked for many during the housing boom, when home-price appreciation built enough equity to allow homeowners to refinance. Amid the bust, many ARM holders are finding they can't refinance because they're underwater with their mortgages. Sadly, many are losing their homes in foreclosure because they used ARMs to buy homes they really couldn't afford. (Before shopping for homes, figure out how much home you can afford here.)

If your finances are solid and you can afford the home you want with a conventional mortgage -- and you're buying for long haul -- the time may be right. And for some buyers, the market is secondary to the reality of family life -- the impending arrival of a new baby may be the deciding factor to whether now is the "right time" to buy. (One big factor in Gerry's decision to buy a home was the desire to start building our lives together.)

When shopping for homes where the market is weak, consider buying a newly built home. Home builders are hoping to lure buyers with discounts of as much as 20% and other valuable incentives, such as granite countertops, luxury appliances and in-ground pools. The National Association of Home Builders reports that 56% of builders are offering financial incentives, up from about 45% a year ago.

The best deals will often be found where home price declines are the worst. But given the severity of the conditions behind the current downturn, the regions that saw the most heady gains during the housing boom -- particularly Arizona, California and Florida -- may take more time to rebound. In other areas of the country, most notably Detroit, the local economy is contributing to home price declines. In these areas it's particularly important to know whether you'll need to sell quickly or not.

There are markets where home prices continue to show steady growth, including Seattle, Atlanta and Dallas, according to Standard & Poor's. If you're shopping in these regions, you'll find the best values if you prove yourself to be a qualified buyer who can quickly close the deal. That means getting your mortgage pre-approved, where you have a written guarantee that you'll get the loan for the amount you need. Also it would help to avoid placing contingencies on the sale, such as the need to sell an old home before closing on the new one.

There are enough contingencies in the market right now without adding too many more.

By Terri Cullen