by Mark Silva

Sen. Hillary Clinton of New York, who has called for a “foreclosure time-out’’ in the sub-prime mortgage market, today outlined a plan for protecting home ownership that includes a national registry of mortgage brokers enabling homeowners to learn more about lenders.

“Although many of us have done well in the last six years, the median income has dropped $1,300,’’ Clinton said, maintaining that misleading mortgage practices are not only hurting homeowners but also endangering the economy.

“This whole idea of pre-payment penalties, which are often buried on page 700 of fine print, often put homeowners in an unbearable position,’’ the Democratic candidate for president said in an interview with CNBC following the delivery of her policy speech on home ownership in Derry, N.H., today.

“I think we’ve got to require that lenders take a different approach with people who may not have the credit-worthiness to handle mortgages that are being given to them,’’ Clinton said. “We are looking at a cascade of foreclosures if we’re not careful here.''

“This has implications for the entire economy,’’ she said. “We’ve seen our economy have to clean up after kinds of messes… We also saw the collapse of the savings and loan industry, because regulators weren’t keeping up with all the new techniques….

“I think that we have not taken the kind of perhaps vigilant action in order to avoid problems that we’re now seeing come home to roost,’’ Clinton said. “I’m saying, wait a minute, let’s take a deep breath here… Let’s see if there’s a way that we can have a win-win… maybe less of a win for the lenders and more of a win for the homeowners.’’

From the Clinton campaign, here is the candidate’s proposal on mortgage reform:

PROTECTING THE DREAM OF HOME OWNERSHIP

Senator Clinton’s plan will curb mortgage abuses, assist families facing foreclosure, and expand affordable housing to protect the American dream of home ownership. She will introduce her plan when Congress returns in September.

Crack Down on Unscrupulous Brokers:

 Require mortgage brokers to disclose to borrowers that their compensation rises when borrowers’ mortgage rates and mortgage fees are high. Too many prospective homebuyers believe that the mortgage broker is acting on their behalf. In fact brokers earn more when they steer borrowers to mortgages with higher rates and fees. The broker’s and borrower’s interests are not always aligned. Borrowers need to be aware of this when assessing the advice brokers give them. To address this need, Hillary will require that brokers disclose to borrowers how they are paid.

 Work with states to develop strong licensing standards and require federal registration for mortgage brokers. Unscrupulous brokers have steered people into high cost mortgages, qualified them for loans they could not afford, and attached fees unnecessarily. These brokers are responsible for many of the lending abuses that occurred in recent years, but there is no single, national source for information about individual brokers. Hillary will establish national registration for brokers so that prospective borrowers can easily look up a broker’s employment history, violations, complaints, and other information. As President, she will also work with the states to develop strong licensing standards to ensure that mortgage brokers are qualified and properly screened.

Crack Down on Mortgage Lending Abuses:

 Eliminate prepayment penalties on mortgage products. Prepayment penalties, which are often used on subprime, Alt-A, and non-traditional mortgages, are a problem for borrowers. These penalties can lock borrowers into loans until the rates and monthly payments escalate. Families should not be discouraged from responsibly paying off their mortgages early, particularly when this would allow them to avoid balloon payments or high floating rates. Studies have shown that loans with prepayment penalties have a 52% greater risk of default than those without. Hillary will restrict the use of prepayment penalties.

 Require mortgage lenders to include the cost of taxes and insurance in the underwriting assessment of higher-risk mortgages. Many borrowers fail to consider taxes and insurance costs when weighing whether they can afford a particular mortgage. Sometimes, lenders exclude those costs from the underwriting assessment, and in the process qualify people for mortgages they cannot afford. Hillary will require that taxes and insurance costs be included in the underwriting assessment so that prospective homeowners can properly determine whether they can afford a particular house. This requirement would apply to subprime mortgages, Alt-A mortgages, and non-traditional mortgages like interest-only, no-money-down, and payment option ARMs.

Help Reduce Foreclosures:

 Establish a $1 billion fund to assist state programs that help at-risk borrowers avoid foreclosure. Hillary will establish a $1 billion fund to support state programs that help at-risk borrowers avoid foreclosure. Some state programs help borrowers make the single payment necessary to become current on their loans; others help borrowers renegotiate their loan terms, or simply provide financial counseling. These foreclosure mitigation efforts are more important than ever right now. Federal assistance for state programs that assist at-risk borrowers supplements Hillary’s call earlier in the year for “foreclosure timeout.” At-risk borrowers and lenders should be encouraged to work out alternatives to foreclosure.

 Expand Fannie Mae’s and Freddie Mac’s Foreclosure Prevention Efforts. Hillary would expand the goals of Fannie and Freddie, the government sponsored enterprises (GSEs) that help stabilize the mortgage markets, to include helping a larger number of at-risk homeowners avoid foreclosure. This would be consistent with Fannie’s and Freddie’s existing goals that promote home ownership. The GSEs already help mitigate foreclosures by enabling some borrowers to swap into less risky, lower-cost loans. Fannie also helps homeowners arrange payment forbearance, financial counseling, and loan restructurings. Hillary will expand those initiatives to make foreclosure mitigation a greater priority.


Expand Affordable Housing:

 Establish a $1 billion fund to provide federal support to housing trust funds established by state, county, and municipal governments. The rise in home prices over recent years, coupled with stagnant wages, has meant that people are committing an increasing share of their salaries to mortgage payments. Between 2001 and 2004, for example, the number of households paying more than half of their incomes on housing increased by 1.9 million. The Joint Center for Housing Studies estimates that housing is a “severe cost burden” for 15.6 million low- and middle-income households. Families facing such strains often forgo necessities. Other families simply forgo home ownership, or turn to high risk, alternative mortgage products. In order to encourage the development of affordable housing, Hillary will establish a $1 billion fund to support state, county, and municipal housing trust funds. Housing trust funds generally use dedicated funding sources to support initiatives like building subsidized rental housing and safety net housing, and they also support nonprofit housing developers. Hillary’s fund will supplement the funding states, counties, and municipalities have already dedicated to these initiatives.

The plan announced today supplements the plan Hillary announced earlier this year to address the problems in subprime mortgages. In that earlier announcement, Hillary called for expanding access to independent face-to-face counseling; restricting prepayment penalties for subprime mortgages; requiring “plain-talk, no-fine-print disclosure”; promoting “foreclosure timeout” in which at-risk borrowers and lenders work out alternatives to foreclosure; and strengthening the Federal Housing Administration so that it could provide more homebuyers with an alternative to the subprime market.