A massive new mortgage reform bill has Washington real estate and banking groups buzzing, both critically and in favor.

The bill was introduced last week by House financial services committee chairman Barney Frank -- who's arguably the most influential legislator on housing issues on Capitol Hill.

Supporters say the 151-page bill would have gone a long way to preventing mortgage lending excesses during the housing boom, especially no-documentation, negative amortization and zero downpayment deals, had it been federal law before the boom started in 2002 or 2003.

The bill, which is expected to pass the House easily this month and go to the Senate in May, would change home mortgage lending fundamentally.

Here's how. It would discourage lenders from making anything but "plain vanilla" 30-year fixed rate mortgages with full documentation and strict underwriting.

It would require lenders that originate other types of loans to retain at least a five percent ownership stake in the loan for its full term, even if it gets sold in the p secondary mortgage bond market.

If the loan ultimately went bad, the originator would own a piece of the loss -- unlike today's system, where they can sell them and forget them.

Francis Creighton, top lobbyist for the Mortgage Bankers Association, says forcing small and mid-sized mortgage companies to set aside capital to cover potential losses would put many of them in financial hardship.

A second major change -- the bill would prohibit loan officers from receiving any fee tied to the interest rate or terms of the mortgage. During the boom years, mortgage brokers routinely were paid fatter fees by Wall Street for delivering higher-rate, higher-risk mortgages.

Some of them steered unsuspecting borrowers who qualified for prime rates into higher-rate subprime loans in order to collect those higher fees.

Frank said those days will soon be over: "There should be no way you can be compensated for steering anyone to a higher rate," he said in an interview.

The bill also creates what it calls a new "federal duty of care" that would legally require lenders to ensure that a mortgage is suitable for the borrower in terms of income and ability to repay.

All refinancings would have to pass what the bill calls a "net tangible benefit" test before closing. In other words, homeowners couldn't be refinanced unless the replacement loan is better for them financially than their existing loan.

There's lots more in this legislation potentially affecting consumers and real estate professionals. We'll do a follow up soon and keep you in the loop.

Published: April 6, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.