Democrats raise the roof over mortgages

US lawmakers are returning to battle over lax mortgage lending as Democrats and their allies say Republicans want to let banks go back to the loose loan standards at the heart of the financial crisis.

Democratic aides say mortgage proposals in a draft bill unveiled by Republicans this week are proof that they are using legislation ostensibly drafted for small banks to instead help Wall Street lenders.

The furore has reopened a debate from the 2008 meltdown over how to ensure that banks offer loans only to people who can repay them without constricting the supply of mortgage credit.

Sherrod Brown, the top Democrat on the Senate banking committee, slammed the bill as a "sprawling industry wishlist of Dodd-Frank rollbacks" after it was unveiled by Richard Shelby, the committee's Republican chair.

Anti-Wall Street advocacy groups said it would reduce banks' incentive to lend responsibly.

Julia Gordon, a housing finance expert at the Center for American Progress, a think-tank close to the Democrats, said: "This returns us to the same misaligned incentives that led us to the crisis, with lenders making money whether or not the person could afford the home."

The debate centres on a category of loans called "qualified mortgages", which protect lenders from lawsuits in the event of a default as long as the loan meets criteria meant to ensure the borrower's ability to pay.

Big banks have been eager to see the criteria loosened so they can offer more mortgages that enjoy liability protection.

The Republican bill proposes to eliminate many of the safety criteria. A GOP aide said the proposal did not eviscerate the existing law but was establishing a new, largely market-based standard for qualified mortgages.

Under this standard, a loan would have qualified mortgage status if the institution holding it in its portfolio retained 100 per cent of the credit risk, even as the legal safe harbour would ensure its legal risk was eliminated.

The holder could be either the originator of the loan or a bank that has subsequently purchased it.

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The Republican aide expressed confidence that the risk retention condition would lead to strong underwriting standards, because it would mean that questionable mortgages became unsellable. "What we're trying to do is restore some common sense to the system," he said.

Ms Gordon was not convinced. "This is just ridiculous," she said. "We know what the market does. Being exposed to credit risk didn't stop anybody from making any loan in the run-up to the crisis."

Specifically, the bill would remove a debt-to-income requirement, which currently means loans are only eligible for qualified mortgage status if the borrower's debt expenses add up to less than 43 per cent of monthly income.

David Stevens, president and chief executive of the Mortgage Bankers Association, an industry lobby group, said he welcomed the draft bill because it could loosen a "tight" mortgage market and spur a broader recovery in housing, which accounts for about a fifth of economic output.

"The very defensive lending posture in the banking system has been built around a framework of regulation that lenders are afraid to come near, for fear of enforcement concerns," he said.

Dennis Kelleher, chief executive of Better Markets, a non-profit group critical of Wall Street, said Mr Shelby was trying to help big banks restart a lucrative mortgage "gravy train".

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"This bill is not a serious bill. This is an ideological message bill, presumably targeted at Wall Street to pretend [Republicans are] fighting on their behalf," he said.

The draft bill will be revised at a public session next Thursday but the bad blood it has unleashed suggests it will not get enough support from Democrats to become law.

Wall Street banks - who were stung last year by a backlash against their success in watering down a Dodd-Frank derivatives rule - said they had not lobbied for the mortgage revisions.

Tony Fratto, a former Bush administration official who is now a consultant for big banks, said the policy goal was to safely improve the availability of housing finance and that it was wrong to "backward engineer" an opinion about the bill based on which banks might benefit.

"It's like saying that if you build a subway stop on the corner of Wall Street and Broad Street it's a giveaway to Wall Street, when you're just trying to help workers get to work," he said.

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