Congress got back to business last week after its holiday recess, and big changes to the U.S. home mortgage system were high on the agenda in the House.

Financial Services Committee chairman Barney Frank and two colleagues have introduced a mega-bill that would make top-to-bottom changes in the way mortgages get made and marketed to borrowers.

But if real estate and mortgage industry testimony at a hearing on the bill is any indication, not everybody's happy with some key provisions, especially those that could limit the types of mortgages that shoppers get to choose.

Charles McMillan, president of the National Association of Realtors, said although his group broadly supports the legislation, Realtors are concerned that it may focus future loan-making too heavily on one type of loan -- fully-documented 30-year fixed rate.

Frank's bill would require lenders to retain at least a five percent credit risk -- or “skin in the game” -- on every mortgage they write that is not a “qualified” 30-year fixed rate.

If the loan later went bad, they'd still be on the hook for at least five percent of the losses. During the subprime boom, by contrast, many brokers and lenders originated loans for sale to investors with little or no expectation they'd ever be blamed for later problems.

The core idea here, say supporters of the legislation, is to cut down on mortgages with high risk features -- negative amortization, interest-only, and short-term adjustables -- that are made with minimal documentation.

But McMillan and other industry leaders told Frank that too narrow a definition of “qualified” could restrict consumer options for financing real estate.

McMillan urged the House to broaden the definition to include 15-and 25-year fixed rate mortgages, plus “5-1” and “7-1” hybrid adjustables.

David Kittle, chairman of the Mortgage Bankers Association, warned that although the bill would not ban alternative loan products, the credit-risk retention rule would mean some commonplace mortgage types might only be offered “at substantially higher costs, if at all.”

He urged Congress to expand the “qualified” list to all FHA-insured mortgages and those eligible for purchase by Fannie Mae or Freddie Mac .

Denise Leonard of the National Association of Mortgage Brokers said the bill in its current form not only would limit loan availability, but would also penalize loan officers who “steer” clients from “qualified” plain-vanilla mortgages into virtually anything else.

The legislation, most likely with some broadening of the definition of what's a qualified mortgage, is expected to pass the House soon, and head to the Senate for final action.

Published: April 27, 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, consumer 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.