Mortgage investment reform wins US House approval

The rules of mortgage finance that held through a five-year housing boom and the current bust would change dramatically under a bill approved on Thursday by the U.S. House of Representatives.

By a 300-114 vote, the House approved a measure that would force mortgage lenders to retain a 5 percent stake in home loans they make, securitize and then sell to investors.

Mortgage brokers would face tighter oversight and lenders would have to prove that homeowners are well-served when they refinance a home loan under the rule. The legislation would also help renters fight eviction when their landlords default on their mortgages.

The House bill's future is uncertain since there is no equivalent Senate legislation. But its passage marks another step by congressional Democrats to overhaul financial regulation and shows bi-partisan support for such reform since 60 Republicans voted in favor of the measure.

"Things have changed. I think this will have momentum in the Senate," said Representative Barney Frank, chairman of the House Financial Services Committee.

Before the housing market started to dive in 2006, Wall Street routinely bought and bundled risky subprime mortgages, shifting 100 percent of the risk onto investors. The 5-percent "skin in the game" rule in the House bill is meant to end that.

Advocates for the risk-sharing provision say it will force banks to "eat their own cooking." But the bill also expands consumer protections.

Mortgage companies will have to prove that the homeowner derives a "net tangible benefit" from a refinancing. Consumer advocates have accused mortgage lenders of duping homeowners into refinancing their home for a quick cash fix that ended up costing the borrower much more in the long run.

Frank, a Democrat from Massachusetts, said that provision was still a bit unclear but its meaning would be found in the application of the law.

"Is it vague? To some extent, but that's what you do with the law and then they are defined by practice," he said. "In terms of net tangible benefit I would say to the person doing the loan, 'Would you tell your mother to do it?'"

The bill would also make sure that renters are notified when their landlord is in default and would give tenants ample time to find a new home.

On Wednesday, the Senate ratified the renter's rights provision, so that portion of the bill could move on a faster track than the rest of the legislation.

The Senate bill would let renters retain their original lease even if a bank has reclaimed the property.