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‘Vanilla’ home loans could help borrowers

A house is for sale in the Staten Island borough of New York on June 16. Under a new government plan, borrowers would be automatically connected to traditional mortgage options.   AP Photo by Mark Lennihan

A house is for sale in the Staten Island borough of New York on June 16. Under a new government plan, borrowers would be automatically connected to traditional mortgage options. AP Photo by Mark Lennihan

Alan Zibel
AP Real Estate Writer

Washington — If President Barack Obama gets his way, consumers who take out mortgages would automatically get a “plain vanilla” loan — such as a traditional 30-year fixed-rate mortgage — unless they opted for a riskier variety.

Obama’s plan to revamp financial regulation aims to protect borrowers from the confusing and high-risk mortgages that fed a pandemic of delinquencies and foreclosures, led to the worst financial crisis in decades and thrust the nation into a deep recession.

Obama is expecting opposition to the plan, and cautioned Saturday in his radio address, “While I’m not spoiling for a fight, I’m ready for one.”

Government officials want to make the process of getting a mortgage simple and abuse-free.

For mortgage brokers, though, the plan threatens to shrink the fee income some have received from encouraging adjustable-rate, interest-only and other risky loans.

Obama’s plan to overhaul financial regulation, unveiled last week, would create a Consumer Financial Protection Agency to monitor consumer financial products and revamp the entire home-loan process.

It’s the administration’s latest step to tackle the aftermath of the housing bust. The administration in March launched a $50 billion plan to give the lending industry financial incentives to modify mortgages to lower payments.

But that plan is off to a slow start. Many housing counselors say it hasn’t made much of a difference nationwide because lenders have been slow or reluctant to cooperate. As of mid-June, about 50,000 borrowers were enrolled in three-month trial modifications under the plan, according to the Treasury Department. The administration initially had said up to 4 million households could be helped.

The Obama administration faces a tough fight over its financial overhaul plan. Powerful trade groups like the American Bankers Association, for example, oppose creating a consumer financial protection agency. Even lobbying groups open to the idea of a consumer-products regulator question whether the government should suggest which mortgages are best for consumers.

“We don’t want to stifle innovation, and we don’t want to stifle competition,” said John Courson, president of the Mortgage Bankers Association.

Traditional fixed-rate loans fell out of favor during the housing boom. They dropped from a 75 percent market share in 2002 and 2003 to around 50 percent in 2004 and 2005, according to Inside Mortgage Finance. But with the housing bubble burst and mortgage rates near historic lows, fixed-rate loans — 30-year, 15-year and other types — now account for about 95 percent of the market.

Supporters say a new consumer regulator is sorely needed. They point to academic research suggesting that consumers, faced with a difficult choice about their personal finances, tend to choose the path of least resistance. As a result, they often make poor decisions.

That’s particularly true with mortgages, which require signing numerous complex documents. Many borrowers say they didn’t understand the loans they signed up for during the housing boom. Some say they were surprised when their rates adjusted.

The Obama plan includes other elements likely to produce drawn-out lobbying fights. For example, administration officials want to curb the fees that brokers and lenders receive tied to inflated mortgage rates.

Brokers argue such fees are a legitimate way for borrowers to afford a loan without having to come up with thousands of dollars in closing costs, because the fees can be spread over the life of a loan. They also intend to fight a plan to have their compensation linked to whether a borrower winds up defaulting.

“There’s no reason that we should have to assume that risk,” said Marc Savitt, president of the National Association of Mortgage Brokers. He argues that brokers merely submit loans to lenders and don’t influence whether the loans are approved.

Brokers have already seen their market share dwindle, from more than 60 percent of new loans at the peak of the market to less than 20 percent now, said David Olson, president of Access Mortgage Research in Columbia, Md.

If mortgage broker fees were eliminated, “that would be the complete kiss of death” for mortgage brokers, Olson said. “That’s really how they make their money.”

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