Losses due to mortgage defaults and foreclosures and their impact on the markets prompted policy makers to scrutinize how mortgages are made, packaged into securities and sold to investors. Months of bipartisan cooperation among the House and Senate resulted in a new set of laws that address some of the root causes of the mortgage foreclosure problems affecting Pennsylvania homeowners.

The following bills are now law:

The concern: The mortgage industry's current licensing requirements are confusing and burdensome.

H.B. 2179 streamlines the licensure process for mortgage brokers and bankers by creating a single license and by creating a new licensing category for mortgage originators, who are the main contact for borrowers. It also requires pre-license and continuing education programs under the guidance and approval of the Banking Department.

The concern: Pre-payment penalties are used by the mortgage industry so consumers do not take advantage of a low introductory rate then re-finance to another, more affordable loan when the higher permanent rate takes effect. The $50,000 threshold to prohibit pre-payment penalties set 33 years ago is unrealistic in terms of today's loan amounts, and has forced many lower-income borrowers to default and foreclosure.

S.B. 483 (similar to H.B. 1084) excludes pre-payment penalties on residential mortgage loans of less than $217,873. This figure is the result of an inflation analysis conducted by the Department of Banking on the $50,000 threshold.

The concern: The Banking Department is prohibited from releasing any information on disciplinary actions against a licensee until all administrative and judicial appeals have been exhausted. For many homeowners who are victims of mortgage fraud, that information comes far too late.

S.B. 484 (similar to H.B. 1082) permits the Banking Department to publicly release information after fined or adjudication actions are levied against mortgage lenders. It also requires criminal background checks on all mortgage originators.

S.B. 485 (similar to H.B. 1081) reforms the State Board of Certified Real Estate Appraisers to intensify checks against fraudulent appraisals and increase penalties for professional misconduct.

S.B. 486 (similar to H.B. 1083) requires lenders to send copies of foreclosure notices to the Pennsylvania Housing Finance Agency so that mortgage foreclosures can be monitored statewide. The interest rate on HEMAP loans also is moved from the fixed 9 percent to a floating rate indexed to current market conditions.

Mortgage Market Math

According to RealtyTrac, the leading online marketplace for foreclosure properties, in 2007 there were more than 2.2 million foreclosure filings on nearly 1.3 million properties across the United States.

The same group found that more than 1 percent of all U.S. households were in some stage of foreclosure in 2007--an increase of 58 percent from the previous year.

RealtyTrac reports that Pennsylvania ranked 23rd in the country in total foreclosures reported for January. The state's foreclosure rate of one foreclosure filing for every 3,222 households ranked it 37th among the 50 states.

In 2006, however, according to a PHFA Housing Study, Pennsylvania had the 12th highest prime foreclosure rate in the United States; the subprime foreclosure rate was 15th highest in the United States

For 2005, Pennsylvania's prime foreclosure rate was 9th highest in the nation; the subprime foreclosure rate was 4th highest

Last year, Pennsylvania had 16,379 total properties with foreclosure filings, per RealtyTrac.

13.9 percent of households with a mortgage spend between 30 percent and 39.9 percent of their income on housing; 6.2 percent spend between 40 percent and 49.9 percent; 11 percent spend more than 50 percent.

At year end 2007, the Pennsylvania Department of Banking issued 20 percent fewer mortgage-business-related licenses compared to year end 2006.

California had the highest number of foreclosure filings; Nevada ranked first among all states for foreclosure rates.

Mortgages and the Markets*

Mortgages form the financial underpinnings of the nation's housing market and have allowed more than two-thirds of households to own their own homes.

Traditionally, banks made and held home loans with money from local deposits. But over the last 30 years, the financing for mortgages has increasingly shifted to investors in the bond market.

During the recent real estate boom, with interest rates at historic lows, investors poured trillions of dollars into mortgage securities in search of higher-yielding assets.

Flush times allowed many homeowners to buy homes or tap into the equity of their properties, driving the homeownership rate to its highest level ever, 69 percent. It also helped drive home prices skyward, especially along the coasts and in the Southwest.

Now, however, mortgage defaults and foreclosures are on the rise and the homeownership rate is falling. Some economists and officials expect that up to two million borrowers may lose their homes because they cannot afford to repay or refinance their loans, because home prices are falling or because they face some other financial distress.

The pain will be most severe in lower-income and working-class neighborhoods, but most economists expect the broader economy to suffer as well.

More than 100 mortgage lenders have gone out of business and banks, hedge funds, pension systems and other investors are expected to lose up to $400 billion.

Banks and the financial markets have become more wary of mortgage securities and borrowings costs have risen for all but the safest borrowers and loans.

The value of American residential real estate could fall by up to $4 trillion, or by about 20 percent, economists estimate.

*source -- New York Times