Mortgage Industry Monitors Financial Overhaul Bill

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The death of Sen. Byrd may mean a delay in passing the financial overhaul bill before Congress. The White House has been pushing for a signing ceremony by July 4th. But even if the date slips, most investors expect the bill to become law. Karen Petrou, of Federal Financial Analytics, talks to Mary Louise Kelly about how the measure affects mortgage lending.


Now, the death, yesterday, of Senator Robert Byrd may mean a delay in passing the huge financial reform bill before Congress. The White House has been pushing for a signing ceremony by July 4th. But even if the date slips, most investors are still expecting the bill will become law. It's the biggest overhaul of financial regulation since the 1930s.

And to find out how it will effect mortgage lending, we called Karen Petrou. She's with the bank consulting firm Federal Financial Analytics. And she says for the average borrower, the bill is nothing but good news.

Ms. KAREN PETROU (Co-Founder/Partner, Federal Financial Analytics): And, in fact, theyll be at less risk because the kind of borrowers who can pay a nice 30-year straightforward mortgage but often got seduced, and I think that's the word, into higher risk products, those products will be harder to get if not banned altogether. So the market will, in general, go back to the shape it should always have been in, which is sound simple mortgages offered to people who can pay them back.

KELLY: So the nice 30-year mortgages that you talked about, that's pretty much going to be what most of us sign up for in the future. I mean as you mentioned, a lot of these more exotic creatures, such as the ones where you could start out just paying interests and put off paying principle for years. Are those going to be a thing of the past?

Ms. PETROU: In the past, they used to be for special markets. For example, loans without documentation used to go just to very wealthy people who had what were called compensating balances in the bank. They had enough money to prove they could pay the bank and they didnt want to go through all the trouble of signing all those papers. And that made sense. We got into trouble because those same loans got offered to people who had no income, had no compensating balance. I think we can have high-flying products out there, and we will, as long as they only go to high-flying people who can pay them back and understand their risks.

KELLY: What about people who want to pay off their loan early? What does this bill say about prepayment penalties?

Ms. PETROU: The bill does a very good thing there, and it makes them impossible, bans them from most mortgages, early on. So the kinds of traps borrowers found themselves in in predatory products are going to be, essentially, prohibited.

KELLY: One of the major changes, of course, will be stricter checks on a borrower's ability to pay. Stricter checks that the person who's borrowing this money can actually pay it back at some point. Is that going to make it harder for some people to get a home loan?

Ms. PETROU: Yes. And...

KELLY: Which is a good thing, you would (unintelligible).

Ms. PETROU: In general, it is a good thing. The tricky bit comes for people who are self-employed, people with seasonal income. But the law is going to be clear on that and banks can still make those loans as long as they double-check. What we need to get away from is people having no income or sometimes, fraudulent loan brokers or others, making it up. That's what got us into a lot of trouble.

KELLY: Now let me flip around to the other side of the table and ask what changes from the bank's point of view. Banks made and will continue to make quite a lot of money off home loans. What changes for them?

Ms. PETROU: The market is going to change in its entirety and how it changes remains to be seen because we dont yet know the fate of Fannie Mae and Freddie Mac or, for that matter, the government. Right now, 95 percent, maybe even more, of the mortgage market is totally dependent on Fannie, Freddie and the FHA - the Federal Housing Administration. We shouldnt have a nationalized mortgage finance system, so figuring out the balance between that and sound private lending is really the next challenge.

KELLY: And just briefly, this bill doesnt really touch Fannie Mae and Freddie Mac. Is that correct?

Ms. PETROU: That's correct. We're going to be studying them, and a good thing, too, but we'll study fast and I hope reform that aspect of the market very, very quickly because it needs it.

KELLY: Bottom line, will mortgage lending become less profitable for banks?

Ms. PETROU: Yes, but it will be less profitable in a good way. Some of the profits were speculative, excessive and the height of the bubble type profits. You know, banks and lenders, everybody always enjoys that, just like eating a giant sundae or having fun, you know you shouldnt. I think we're going to go back to a nice plain little dish of vanilla ice cream and away from the hot fudge sauce in mortgage finance, and that's a good thing.

KELLY: Okay. Thanks very much.

Ms. PETROU: Thank you.

KELLY: That's Karen Petrou. She's managing partner at Federal Financial Analytics, which is a research and banking consulting firm in Washington, D.C.

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