US backs home lending clampdown

Default rates have reached record levels in the US

The US House of Representatives has voted to regulate mortgage brokers in an attempt to prevent a recurrence of the current housing market crisis.

The bill calls for the licensing of mortgage brokers and loan officers and also bans predatory lending practices.

Lenders would have to take steps to ensure than prospective borrowers would be able to repay their loans.

There would also be a ban on incentive schemes that encouraged brokers to steer borrowers into unsuitable loans.

Sue your bank

The bill also contains provisions that would allow borrowers to sue the bank that issued the mortgage, even if they sold it on to bondholders, if the bank had not exercised 'due diligence' in checking that the loans were made fairly.

This provision is fiercely opposed by the mortgage industry, which argues it would kill the $6 trillion mortgage bond market, and make it more difficult for poor people to get mortgages.

"What we have today is a bill that cannot undo what happened, but makes it much less likely it will happen in the future," said Congressman Barney Frank, chairman of the House Financial Services Committee.

The bill will face a rougher passage in the Senate. The Senate Banking Committee has not yet introduced its own bill to tackle the sub-prime crisis, and the two measures would have to be reconciled by a joint committee before becoming law.

"Congress does two things very well: one is nothing and two is overreact," said Repubican Congressman Tom Price.

Bipartisan Support

However, the bill passed by a wide margin in the House of Representatives, as northern Republicans joined with Democrats, who hold a slim majority, in backing the measures.

The growing wave of foreclosures across the US, which is destabilising the housing market and could lead to 2 million families losing their homes, has put pressure on Congress to do something to sort out the problem.

But the new legislation is mainly aimed at stopping sub-prime abuses from happening again, and it will not in itself stop foreclosures.

The Bush administration is hoping that lenders and borrowers will come to a voluntary agreement to renegotiate as many cases as possible before foreclosing, but so far only 1% of foreclosures have been renegotiated.

Growing crisis

The US housing bubble was created by lenders loosening their standards for mortgage lending and giving loans to people who would previously have been ineligible.

Borrowers were attracted by low initial rates of interest, but found that they were unable to make their monthly payments once the interest rates increased.

That led to record defaults, which has had knock-on effects on banks worldwide that had bought up packages of US mortgage debt.

The US Fed has provided cash to money markets, and has cut interest rates twice so far, but credit markets are still frozen.

And so far major banks around the world have revealed more than $60bn in losses from the crisis.