Q & A with Chairman Frank: the House Financial Services Committee has been very active this session on many issues of importance o the mortgage industry. Committee Chairman Barney Frank recently introduced his own anti-predatory-lending bill, and we sat down to talk to him about it

Mortgage Banking, Dec, 2007 by Robert Stowe England

Rep. Barney Frank (D-Massachusetts) became chairman of the House Financial Services Committee when Democrats won back control of the Congress. The chairman has been actively moving an impressive list of legislation out of his committee. And recently he introduced major legislation intended to curb predatory lending and tighten mortgage practices that passed the House by a vote of 291 to 127. Frank was interviewed in his office in the Rayburn House Office Building in late October.

Q: You stated during the first hearing on The Mortgage Reform and Anti-Predatory Lending Act of 2007 [H.R. 3915] that "sometimes the announcement of the hearing is more important than the hearing." Would you explain what you meant?

A: Yes: Sometimes ... when there are executive branch agencies that you are prodding to take action that they should have taken some time ago, the prospect of having to come [and] explain why they haven't taken action gets them to take it.

A very good example of that is the FACTA Act [Fair and Accurate Credit Transactions Act]. In that bill, Congress said that the regulators have to come [up] with a set of rules whereby consumers could contest the credit charges they thought were inaccurate or unfair. And we made the mistake of giving it to six agencies. And the fact is, you see, not surprisingly, several years later nothing had been done, and when I reminded them at hearings, [saying,] "You guys haven't done anything," ... they said, "Well, we're going to do something." So I crafted a bill taking most of them out of the equation and giving it to the FTC [Federal Trade Commission]. I was about to have a hearing on that bill and they wrote me a letter and said, "Oh, we're going to get it done."

Q: And they did?

A: They're about to.

Q: Borrowers and lenders have been turning in greater numbers to the Federal Housing Administration [FHA], Fannie Mae and Freddie Mac in the wake of the collapse of the private-label mortgage-backed securities [MBS] market. Do you find that the fallout from recent mortgage market turmoil has confirmed the value of their role in the U.S. housing finance market? Do you think they are playing a valuable role in preventing the housing recession and mortgage meltdown from being far worse?

A: Yes, although they could play a greater role. The FHA has not had a great role, and we're trying to expand it, and it's just now [about to fall] into place. Fannie Mae and Freddie Mac, clearly, have some role. But you had this [situation where], if you didn't have a mortgage that could be bought by Freddie and Fannie, nobody was making it--whether it was the high end or the low end. Clearly, it would have been a lot worse without Freddie and Fannie. The FHA has not yet made a very significant difference. But if everything goes right, it will in a few months.

Q: The government-sponsored enterprise [GSE] reform legislation that passed the House has gotten high marks and widespread support. It was years in the making. How was the House able to come together in a way that garnered such widespread support?

A: Technically, it was [by] using common sense--listening to what people are saying and testing them against specifics.... The problems [the GSEs] were having were not inherently the structures. They were breached by individuals.

Q: Following up on that, do you think [the Mortgage Reform and Anti-Predatory Lending Act of 2007, H.R. 3915] will achieve that same level of support?

A: Not quite that level of support, but I think we can get a pretty significant level of support. By the way, initially there are more private interests that are opposed to it [H.R. 3915]--legitimately opposed [--than were opposed to the GSE reform bill.] But I think we will get not as much support, but significant support. There will be a very hefty vote in favor [of it in the House].

Q: In the future, Fannie and Freddie will not purchase any private-label mortgage-backed securities that are not underwritten so that the borrower can afford the payment after the rate resets. This is likely to lead most Wall Street mortgage bond deals to be underwritten to this standard, since the two GSEs are such major purchasers of mortgage-backed securities. What do you think of this change?

A: It's a very good idea. The fundamental principle you shouldn't make mortgage loans that can't be repaid has to permeate the whole market. And Fannie and Freddie have very effective ways to get it done.

Q: Can this indirect regulation be effective on a part of the market that is lightly regulated or not regulated at all?

A: I'm not waiting only for that. We want to pass a bill that makes that an explicit obligation. But even if you have a bill that makes it explicit, that ought to be enforced. Fannie and Freddie [can] make that provision very important.

Q: You have noted that the problems in subprime that led to the mortgage meltdown occurred in entities that were lightly regulated or not regulated at all. Do you think that the federal and state bank regulators have done a good job in overseeing the loan activities of depository institutions?