Last month, members of Congress marked up mortgage related bill H.R. 5148, short titled Access to Affordable Mortgages Act of 2014.[1] The main point of this bill is to exempt higher priced mortgages from the appraisal requirements set forth by the Truth in Lending Act Section 129H and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (TILA and FIRREA), when the creditor is refinancing a property valued at less than $250K. Loans that will likely be covered by this exemptions would be high-risk mortgages.

Congressman Blaine Luetkemeyer, Republican of Missouri, introduced this bill on July 17th, and couple of weeks later, the bill was marked up by members of the Committee on Financial Services. Still, the bill needs to pass the House, the Senate and be signed by the President in order to become law. Some people believe the bill has little chances of passing these, but if enacted, the bill could have a positive impact for middle and low income households.

DEFINITIONS

High risk mortgages may also be called higher priced mortgages (HPM) because the interest rate associated with the loan will be higher and in parity with risk the borrower(s) pose. If the borrower has a poor financial history, the lender may lent to him/her but charge a higher interest rate for doing so. Hence, high-risk = high-price. From Jeffrey Werthan and Christina Grigorian:[2]

A higher-risk mortgage is a residential mortgage loan secured by a principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set

• By 1.5 or more percentage points, for a first lien residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454);
• By 2.5 or more percentage points, for a first lien residential mortgage loan having an original principal obligation amount that exceeds the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); or
• By 3.5 or more percentage points, for a subordinate lien residential mortgage loan

BACKGROUND

Right now, TILA Section 129H (Regulation Z) requires lenders to obtain written appraisals performed by certified/licensed appraisers whenever we extend credit for a higher-risk mortgage. But some lenders have complained the appraisal requirements can be a deterrent for risk-mitigation and foreclosure prevention actions because these impose additional financial burdens.

IN SHORT

The bill intends to write this exceptions into TILA and FIRREA, and I believe Congressman Luetkemeyer was motivated by a high number of constituents who are facing underwater/default/delinquent mortgage scenarios. I am not sure that saving $200 - $800 for a certified appraisal will incentivize lenders to consider risk mitigation and foreclosure prevention actions (loan modifications or refinancing), still, the vocalization of the bill prompts us to recognize there is a need for us to work with troubled borrowers and the government is asking us to help.

1) http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=389218

2) http://www.lexology.com/library/detail.aspx?g=f3e47311-3678-498a-9dc2-696c27b44b50

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