Lenders: Mortgage proposals fall short

New Jersey Foreclosure & Investor News

By HUGH R. MORLEY
STAFF WRITER

Lenders and investors are concerned over legislation taking aim at the mortgage industry in response to the subprime loan crisis.

A package of bills under discussion would require mortgage solicitors to be licensed, and lenders to better ensure that a mortgage applicant can afford the loan.

Two of the bills seek to protect financially distressed property owners from foreclosure consultants -- private businesses that offer help in resolving the debt but in some cases defraud the homeowner and take their property.

The bills were sparked by concern at the number of adjustable-rate mortgages granted to high-risk borrowers who later couldn't make the mortgage payments.

Representatives of mortgage bankers and real estate investors, however, say parts of the legislation are vague and overbroad and could hurt legitimate businesses. One bill could even scare investors away from bailing out distressed property owners, an investor group said.

So far, only one of the bills -- which were introduced in the last two months -- has gotten committee approval. The bills include:

• S-2646, which would impose more stringent licensing and educational requirements for mortgage solicitors, the middlemen who connect someone looking for a loan with a lender. Current law requires only that mortgage solicitors register with the state Department of Banking and Insurance. The bill would require them to be licensed by the department and to undergo a full background check, take at least 24 hours of training and pass an exam.
• A-4213, which seeks to ensure that borrowers aren't lured into a loan for which they can't meet the payments. The bill -- called the Teaser Rate Protection Act -- would require lenders to make a "reasonable inquiry" into a borrower's finances. It also would require the lender to determine whether an applicant can afford a mortgage by estimating the monthly payments using the interest rate over the entire life of the loan, not just in the early years when it is frequently lower. The bill also requires the lender to set up an escrow account to ensure that taxes, insurance premiums and other charges related to the property are collected and paid.
• A-4214, called the Foreclosure Rescue Fraud Prevention Act, which aims to bolster the rights of the homeowner in dealings with a foreclosure consultant, a private business that offers to help a distressed homeowner either by finding a loan or a buyer for the house. Parts of the bill also concern purchasers of distressed property.

  The bill would give a homeowner the right to get out of a foreclosure consultant contract at any time until the services are completed. It would prohibit consultants from collecting a fee until services are rendered, except where agreed. And the bill would require consultants to post a bond with the state Division of Consumer Affairs.

  Violators would face a $10,000 penalty for the first offense and $20,000 for each subsequent offense. They could also face second- or third-degree criminal charges, depending on the circumstances.

• S-2699, called the Foreclosure Consulting and Anti-Fraud Act, which would require foreclosure consultants to get a "debt adjuster" license from the Department of Banking and Insurance. The bill also would give the department regulatory power to define the licensing standards for consultants and would require applicants to undergo a background check. The proposed law also would enable someone damaged by a consultant who violates the law to claim punitive damages and attorney fees.

  Sen. Ellen Karcher, D-Monmouth, who co-sponsored two foreclosure consultant bills, said they were prompted by the need to protect homeowners struggling to pay their mortgage as they try to resolve their problems in a moment of great pressure and stress.

  "In the excitement of buying a new home, I don't think people think about the possibility that they could be in a place where they wouldn't be able to afford it," she said. "People are not particularly well-equipped to handle the possibility of having a foreclosure."

  But Dan Schwartz, president of Metropolitan Real Estate Investors Association, a not-for-profit group that educates property investors, said the bills are so vague they could apply to buyers, not just consultants.

  In particular, he said, the association fears that an investor who bought property from a distressed homeowner could later find the former owner using provisions of A-4214 to claim the home was unfairly taken.

  "The bill is worded so onerously that no real estate professional is going to want to try to help a homeowner in distress," he said. "There will be a huge increase in the number of foreclosures."

  E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, said that although the foreclosure consultant bills are vague, they aren't problematic to his members.

  But he said the "teaser rate" bill is so broad that it could shut out legitimate house buyers from securing a mortgage. For instance, a newly qualified doctor could expect to significantly increase his earnings within a few years, and so could afford a rising mortgage, Levy said.

  But the bill could force a lender to deny the doctor a mortgage because he earns too little at the time it's issued, he said.

  "It's overbroad," he said. "You are hurting certain borrowers unnecessarily."

  This column appears every Wednesday. E-mail: morley@northjersey.com

 

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