Look for housing changes when Democrats rule

By HOLDEN LEWIS
Tuesday, November 21, 2006
Homeowners and prospective homebuyers will see changes when the Democrats take control of both houses of Congress early in 2007. Democrats have different priorities from Republicans on issues such as affordable housing, land-use restrictions and predatory lending.

The political party that has the most influence over the size of Americans' monthly mortgage payments didn't get a single vote. That's because the Chinese Communist Party wasn't on the ballot. The cash to pay for our budget and trade deficits has to come from somewhere, and in recent years America's most enthusiastic lender has been China's central bank.

China and other big creditors, such as Japan, the United Kingdom and South Korea, lend us money by buying myriad types of bonds: U.S. Treasury notes, mortgage-backed securities and corporate bonds. If investors didn't want these bonds, yields would have to be high to entice buyers. But lenders eagerly line up to extend credit, so we pay low yields.

Kenneth Thomas, a lecturer in finance at The Wharton School at the University of Pennsylvania, says international investors push long-term U.S. rates down half a percentage point or more.

"So if you're paying, let's say 6.5 percent on a mortgage, or 6.75 percent, you might be paying 7 or 7.25 if it wasn't for the Chinese," Thomas says.

When it comes to housing and mortgage issues, two of the most important members of the next Congress will be Democrats: Rep. Barney Frank of Massachusetts, who probably will be chairman of the House Financial Services Committee, and Sen. Chris Dodd of Connecticut, in line to be chairman of the Senate Committee on Banking, Housing, and Urban Affairs. Observers expect Frank to take a more active approach than Dodd on housing-related issues.

Kurt Pfotenhauer, senior vice president for government affairs and public policy for the Mortgage Bankers Association, speculates that among Frank's priorities will be enacting stricter oversight over mortgage giants Fannie Mae and Freddie Mac, reforming the Federal Housing Administration's mortgage insurance program and combating predatory lending.

Fannie Mae and Freddie Mac have been involved in accounting scandals, and some members of Congress worry that they have grown too big to fail and that they should focus more effort on putting more money into the hands of low- to moderate-income borrowers. A reform bill would be designed to keep Fannie and Freddie stable over the next few decades.

"I think the one immediate impact we'll see when we get a bill passed is the creation of a housing trust fund that will push a little bit more capital into low- and moderate-income housing," Pfotenhauer says.

Frank supports letting the FHA charge more to insure the mortgages of the riskiest borrowers. But he wants those riskiest borrowers to get money back if they keep current on their mortgage payments for five years.

As for predatory mortgage lending, the term is difficult to define. Several states and cities have enacted anti-predatory lending laws that limit interest rates and ban lenders from extending mortgages that can't be repaid. Some observers expect Frank to depart from liberal dogma and accept a national standard that would pre-empt state and local anti-predatory lending laws.

Frank "recognizes you need a uniform standard that protects consumers but doesn't have the unintended consequence of lenders pulling back on consumers," says Paul Leonard, vice president of government affairs for the Housing Policy Council of the Financial Services Roundtable.

Consumer advocates take a wait-and-see attitude about the liberal representative from Massachusetts.

Bruce Hahn, president and CEO of the American Homeowners Grassroots Alliance, believes there's a better chance that Congress will make private mortgage insurance payments tax-deductible. "I think it's going to help expand homeownership among low- to moderate-income borrowers," Hahn says. "Prospective buyers would be able to deduct more and, therefore, afford more."

After years of Republican domination of Congress, consumer advocates are accustomed to playing defense. Now the housing and mortgage industries might find themselves in the same position, especially regarding environmental regulation.

"We believe that land-use decisions are best made at the lowest possible form of government," _ cities, townships, counties, says Jerry Howard, chief executive of the National Association of Home Builders. "However, there are a great many federal statutes that have serious ramifications for land use." One of the chief bugaboos is strict enforcement of the Clean Water Act. Democrats are more likely to embrace "extreme interpretations" of that law, Howard says.

"In a Republican-controlled Congress, we think many of those questions are likely to be answered in a more balanced way, rather than in a Democrat-controlled Congress, where they are more likely to be answered in an overzealous way."

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The benchmark 30-year, fixed-rate mortgage fell 8 basis points to 6.24 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 6.42 percent; four weeks ago, it was also 6.42 percent.

The 15-year, fixed-rate mortgage fell 4 basis points to 5.98 percent. The 5/1 adjustable-rate mortgage fell 3 basis points to 6.13 percent.