Top officials push financial reform

The Baltimore Sun

WASHINGTON -- A presidential working group issued a broad set of proposals yesterday to correct weaknesses in the way homes are financed so that the problems now crippling the nation's housing sector won't recur.

The President's Working Group on Financial Markets recommended changes in virtually every area of mortgage finance. It called for tougher state and federal regulation of mortgage lending and mortgage brokers. It also supported creating a national licensing standard for anyone who originates mortgages.

Its report is notable, however, for its restraint in expanding federal regulation: The national licensing scheme, for example, still would depend on enforcement by states. Weak local enforcement is one major reason that the housing market grew into a bubble and then burst.

The report also didn't propose putting the non-bank lenders, who underwrote about three-fourths of the now-toxic subprime mortgages, under federal regulation. Non-bank lenders, the largest of which are now in bankruptcy, must follow federal principles that are enforced by states, which often lack the capacity to do so.

The group's recommendations don't offer help to homeowners who are struggling now, but they acknowledge that federal regulators fell down on the job.

In a speech detailing the recommendations, Treasury Secretary Henry M. Paulson Jr. said "market participants and regulators became complacent about all types of risks."

Many of the recommendations endorse efforts that the Federal Reserve already has undertaken to address shortcomings in mortgage lending.

Others call for obvious improvements in performance, such as calling on the financial sector to evaluate risks better and for government regulators to talk to each other more.

"The Paulson strategy seems to be 'let the market work things out, with us as cheerleaders,' by and large," said Kurt Eggert, a law professor at Chapman University in Orange, Calif., and a former member of the Fed's Consumer Advisory Board. "That's what a significant portion of this plan is, scolding people and telling people they should do what they already should."

The working group -- which includes the heads of the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and other federal agencies -- also proposed changes in how home loans are sold from one bank to another, then packaged in bulk into mortgage bonds.

The proposals call for the companies that issue mortgage bonds -- called mortgage-backed securities -- to disclose more information about how they've verified the loans that underlie the bonds being offered to investors. This, however, stops short of holding the purchasers in the secondary market accountable for the loans they're buying and bundling.

Only recently was the Securities and Exchange Commission granted powers to regulate credit-rating agencies, which certify the soundness of companies that issue mortgage bonds.

Under yesterday's recommendations, the SEC will ask issuers of mortgage bonds to use different rating systems for the complex financial instruments that bundle loans into bonds. These ratings would differ from the ratings for conventional bonds.

The panel's report was released on the same day that the chairmen of the House Financial Services Committee and the Senate banking committee announced plans to introduce legislation to provide up to $300 billion in federal guarantees to help people who are in danger of losing their homes to foreclosure to refinance into affordable mortgages.

The latest foreclosure readings from the Mortgage Bankers Association show that 1 in every 20 home loans nationwide is past due. Against that backdrop, the chairmen of the Senate and House committees announced their plan to have the Federal Housing Administration insure at-risk loans that lenders have agreed to modify.

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