Pennsylvania proposes sweeping mortgage reforms

(Thomson Financial delivered by Newstex) --

PHILADELPHIA (AP) - Jennie Scott is facing higher mortgage payments next month that she can't afford on her $1,000 monthly Social Security income.

The 74-year-old North Philadelphia widow took on a $55,000 loan three years ago to pay off credit card debt and the remainder of her original mortgage. A mortgage broker locked her into the loan with a prepayment penalty. Now, her adjustable rate mortgage is scheduled to reset higher -- a fact she said her broker failed to disclose when she was signing the papers.

'I'm a little depressed, but I'm trying to keep on going,' Scott said.

Illegal? Not under current state laws, which don't require clearly understandable and upfront disclosure of key loan terms, don't ban prepayment penalties in many cases, and don't force lenders to consider a borrower's ability to repay the entire loan before granting the mortgage.

It might be too late for Scott, but the state Banking Department hopes to help other consumers by proposing the most sweeping mortgage reforms in the state in nearly 20 years. If enacted, the changes would crack down on unethical sales practices that push buyers into unaffordable loans, raise fines, close loopholes and toughen laws to fight abusive lending practices.

'We're pursuing it ardently,' said Steven Kaplan, the state's banking secretary, who testified before the Senate banking and insurance committee last week on the proposals. 'I would hope that later this year or very early next year we might actually have something that we can enforce.'
The reform package comprises six bills as well as changes in department policies.

Proposals include: raising fines for offenders, including a tenfold increase in penalties for appraisers who overvalue homes; banning prepayment penalties for loans up to $197,000; requiring upfront disclosure of adjustable rates, balloon payments and other key loan features; and mandating that lenders make sure a borrower can repay the fully amortized loan, not just the teaser rate.

Individual mortgage originators, not just their companies, must be licensed. The banking department also wants to be able to more quickly tell the public when an action is taken against an errant mortgage licensee. To do so under current law is a misdemeanor.

'It's incredibly frustrating,' said banking department spokeswoman Heather Tyler.

Many households need help. In the second quarter, Pennsylvania's delinquency rates on residential mortgages rose to 5.58 percent from 4.85 percent in the first quarter and 5.20 percent a year ago, excluding loans already in foreclosure. That's higher than the national delinquency rate of 5.12 percent. Delinquencies on subprime loans (those given to borrowers with weak credit histories) rose to 15 percent from 13.37 percent in 2006.

In August, foreclosures in Pennsylvania rose by 9.3 percent to 3,108 from a year ago, according to RealtyTrac Inc. Counties with the highest number of foreclosures in August were Philadelphia, Allegheny, Bucks, Chester, Delaware and Luzerne.

But there's some help for homeowners. In July, the Pennsylvania Housing Finance Agency began a loan program that helps homeowners in complex loans switch to traditional 30-year fixed mortgages at typically lower interest rates.

Called Refinance to an Affordable Loan, or REAL, the program has been adopted by 67 lenders including Countrywide Financial Corp. (NYSE:CFC) , Sovereign Bank (NYSE:SOV) , GMAC (NYSE:GM) Financial Services and JPMorgan Chase. (NYSE:JPM PRH) (NYSE:JPM PRX) (NYSE:JPM PRK) (NYSE:JPM PRJ) (NYSE:JPT) (NYSE:JPM) Borrowers generally must not make more than $120,000, among other conditions. The state will lend up to 100 percent of the mortgage.

There's also a proposal to amend an existing foreclosure prevention program's interest rate from 9 percent to current lower market rates. The Homeowners' Emergency Mortgage Assistance Program, which will lend up to $60,000 per borrower, began in 1983 and helped steelworkers keep their homes as mills closed. The minimum payment is $25 a month and the average loan is $10,000.

Mortgage bankers agree with some proposals but not others, such as restriction of prepayment penalties, said E. Robert Levy, executive director of the Mortgage Bankers Association of Pennsylvania.

He also said a national database of licensed mortgage lenders and brokers is being planned for January. Someone who loses a license in one state won't be able to get a license elsewhere.

As states and Congress look at mortgage reform, he said the bankers are concerned that lawmakers' actions could prove to be 'an overreaction and harm not only the industry but consumers.'
But mortgage lenders and brokers are major contributors to the current crisis, said Irwin Trauss, supervising attorney for the consumer housing unit of Philadelphia Legal Assistance. The result has been a sharp increase in homeowners seeking aid from Philadelphia area community groups.

'It's an epidemic that spread,' he said at a Philadelphia Federal Reserve Bank foreclosure summit last week. 'It's now affecting people with money. It's not just a low-income problem.'

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