With the mortgage-sparked credit crisis expected to worsen over the next year, Maryland lawmakers are exploring legislation aimed at protecting consumers and forcing lenders to examine a borrower's qualifications more carefully before offering loans.
"We need to prevent people from getting into loans that set them up for failure," Maryland's secretary of labor, licensing and regulation, Thomas E. Perez, said yesterday at a hearing in Annapolis. "Foreclosures not only tear families apart, but they undermine communities."
About a dozen states have begun to make legislative and regulatory changes aimed at protecting subprime borrowers. Gov. Martin O'Malley and Attorney General Douglas F. Gansler have convened task forces to examine the subprime market and find ways to help forestall foreclosures. Legislative fixes could become a major thrust of the General Assembly session that begins in January.
Problems in credit markets, which have hit disparate segments of the global economy, began with rising defaults and foreclosures on subprime mortgages, those extended to borrowers with weak credit histories.
As many as 45,000 subprime loans that originated in Maryland during the housing boom in 2004-2006 - one in five - will end in foreclosure, according to projections by the Center for Responsible Lending, a consumer advocacy group.
"The mortgage crisis is very real in Maryland and likely to get worse," Ardi Hollifield, a legislative associate with the center, told lawmakers yesterday.
Industry groups are girding for a fight. Representatives with the Maryland Bankers Association, the Mortgage Bankers Association and the Maryland Association of Mortgage Brokers urged the Senate Finance Committee, which held the hearing, to be wary of legislation that could destroy the subprime lending market.
State officials also said they don't want to hurt the market. Subprime loans have opened up credit to many who would not have qualified for a loan a decade ago, especially lower-income and minority borrowers.
The credit crisis is not as pronounced in Maryland as in other parts of the country. Homeownership rates have risen in the state to 72 percent, compared with 68 percent nationally. Meanwhile, the foreclosure rate on subprime loans in the state was 2.4 percent during the first quarter, below the national rate of 5.1 percent.
The Department of Housing and Community Development has invested $110 million in programs to help homeowners get out of exotic mortgages and avoid foreclosure. O'Malley also has authorized $1 million for grants to nonprofit groups to provide information to prospective homeowners.
D. Robert Enten, general counsel for the Maryland Bankers Association, said legislators should be careful not to over-regulate an industry that is already subject to federal regulation. He said the "cyclical" credit crisis will pass, and higher defaults on subprime loans should not be surprising.
"These are people for whom it's a stretch," Enten said. "It's a stretch to make these loans."
Industry officials, many of whom are participating in the task forces, said they might support some legislative proposals. David Pulford, president of the Mortgage Bankers Association, said his group would like to see increased enforcement of existing regulations and more education and counseling about financial issues, especially mortgages.
Clay Opara, of the mortgage brokers group, said it favors a proposal that would require mortgage originators to put their license numbers on all loan documents, to allow better tracking of foreclosures by originator. "We are positive that at the end of the day, 4 to 5 percent of the cowboys out there are causing 80 percent of the problems," Opara said.
Some states are looking to require that mortgage brokers act in the best interests of consumers. Roughly two-thirds of mortgages are originated through brokers, and consumer advocates say some steered borrowers to high-cost loans or deliberately excluded real estate taxes and insurance escrow to make mortgage payments look more affordable.
"I firmly believe most mortgage brokers are trying to do the right thing, but the pressure is enormous for them to close the deal," said Steve Silverman, chief of the consumer protection division at the attorney general's office.
Other proposals are aimed at tightening standards used in deciding whether to make loans. One would require that lenders verify a borrower's income. Another would force lenders to consider a borrower's ability to repay an adjustable rate mortgage at the higher reset rate. Many borrowers signed up for such loans at low initial rates and fell behind on payments once the rate reset after a period of time.
The adjustable mortgages soared in popularity during the housing market boom, and billions of dollars worth of the loans are expected to reset over the next year, peaking this October at $50 billion worth nationally.
Sen. John C. Astle, an Anne Arundel County Democrat and vice chairman of the Finance Committee, said legislation affecting industry should be weighed against the borrower's role in the debacle. "There may be a need for additional regulation, but at some point personal responsibility has to enter the equation," he said.
Sen. Delores G. Kelley, a Baltimore County Democrat and a member of the committee, pointed out that legislative efforts could be hampered by the fact that federally chartered banks are generally not subject to state regulation.
The U.S. Supreme Court recently limited the power of states to oversee financial institutions, sparing so-called national banks from a patchwork of state rules. The ruling dashed hopes of Maryland regulators, who had hoped to impose on national banks a prohibition against prepayment penalties, which have been blamed for locking borrowers into bad loans.