The economy teeters on the edge of recession. Economists tell us that abuses in the subprime mortgage market are pushing us off the cliff.
Subprime mortgages have enabled many Americans who couldn't qualify for a conventional loan to realize the dream of home ownership. That's a good thing. But when the housing market overheated in recent years, buyers took out loans they couldn't repay.
The result is a wave of foreclosures rolling across the country. So far Oregon has seen fewer foreclosures than other states. But the foreclosure wave is hitting here now and threatens to swamp those who stretched the furthest to get into a home.
Oregon needs new legislation on subprime mortgages to rein in lending practices that make borrowers likely to default. The trouble comes mainly from adjustable rate mortgages (ARMs) that start out with a low teaser interest rate. The borrower can afford the monthly payment until it jumps up when the interest rate resets after a year or two. Sometimes the borrower faces a pre-payment penalty when refinancing to get out of the ARM.
Last fall I joined a work group of legislators, consumer advocates and lenders to develop proposals for the legislative session that convened this week. The work group has proposed legislation to make three worthwhile changes:
First, the legislation would regulate so-called mortgage 'rescues' by consultants who offer help to homeowners facing foreclosure. Too often these rescuers victimize the homeowner instead of helping. They take title to the house, rent it back to the borrower and end up with whatever equity the borrower had built up. The legislation would require clear disclosure of the contract with the rescuer and give the homeowner a right to cancel.
Second, the legislation would require better notice of foreclosure to homeowners. Existing notices are long and highly technical and don't give the homeowner practical options for avoiding foreclosure.
Third, the legislation would take action against loan originators who engage in dishonest, fraudulent or illegal practices or act negligently or incompetently.
These bills, which I support along with rest of the work group, are good as far as they go. But they don't address some of the serious problems with subprime mortgages.
For that reason I have declared my support for the Responsible Home Buying Act, introduced by Sen. Ben Westlund, and will be adding my name as a co-sponsor. This act was developed along with consumer advocates over resistance from some in the mortgage industry.
The Responsible Home Buying Act would ban pre-payment penalties on subprime mortgages. This reform is important. A homeowner who takes out an ARM with a pre-payment penalty is stuck as soon as the loan documents are signed. The homeowner must pay either the penalty or the high interest after the loan resets.
The act also would create a duty for loan originators to offer the best fixed-rate loan borrowers qualify for instead of steering them into loans they can't afford. It also would ban lending to a borrower who does not show an ability to make payments through the life of the loan, including those due after the interest rate resets.
The Legislature convened this week to address problems that can't wait until the regular session next year. Subprime mortgages top the agenda.
I can be reached about this and other issues in the legislative session by regular mail at 900 Court St., Salem, OR 97301 or e-mail at rep.gregmacphersonstate.or.us.
Rep. Greg Macpherson, Lake Oswego, represents Oregon House District 38.