Responsible lending, responsible borrowing

Over the past decade, the financial services industry significantly increased mortgage lending as a result of active encouragement from Congress, regulators and the American public. This new lending was primarily for consumers who had previously been denied opportunities for homeownership, also known as the sub-prime market.

This large increase in sub-prime mortgages made the dream of homeownership a reality for millions of borrowers. Unfortunately, some of the excesses of sub-prime lending led to the problems we now face. Those problems — reduced access to credit, the higher cost of credit and increasing delinquencies and foreclosures — affect all of us, and it is essential that we work together to develop solutions. There is no panacea to this current situation. However, we can collectively help ease the pain.

The industry has the responsibility to work with homeowners to develop solutions that work for each situation. Homeowners have the responsibility to contact their lender when they are unable to make a mortgage payment or if they believe they will be unable to do so. The Federal Reserve, other regulators and Congress have the responsibility to thoroughly examine the environment and pass legislation and issue regulations that address real problems, assisting homeowners without reducing access to credit or increasing its cost.

Home lenders are working hard to develop ways to assist as many homeowners in distress as possible. Already, the industry has created HOPE, a partnership of The Financial Services Roundtable’s Housing Policy Council, NeighborWorks America, the Homeownership Preservation Foundation, and others, to provide homeowners in distress with access to independent, trained counselors. Further, most lenders willingly offer modifications to mortgages to help people stay in their homes.

Where do we go from here? Here are 10 things to do now:

1. Assistance to current homeowners in distress. 1-888-995-HOPE is a hotline offering free, nonprofit, HUD-certified counseling to homeowners in financial difficulty. NeighborWorks and the Homeownership Preservation Foundation, supported by our member companies, have operated this hotline for 18 months. HOPE is currently handling 1,500 calls a day, with significant success.

2. Ability to repay. Lenders should only make mortgage loans in which the borrower has the demonstrated ability to repay the loan. Lenders have widely adopted this principle and federal regulatory agencies have included it in guidance.

3. Strong, prudent regulations. Financial regulatory agencies should act promptly to produce regulations which are enforced and which apply uniformly, regardless of whether the lender has a federal or state license or charter.

4. Federal legislation. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, are developing legislation. Any legislation should strengthen underwriting standards for subprime lending, require licensing of mortgage brokers, create uniform national standards that apply to all lenders, prohibit predatory lending practices and strengthen and simplify disclosures for consumers. Care must be exercised so that it does not inadvertently deny credit to low-income borrowers or raise its cost.

5. Securities market. Wall Street should simplify and standardize servicing agreements to encourage loan modifications and ensure that counseling fees are reimbursable.

6. Loan modifications. To reduce delinquencies and foreclosures, lenders should contact at-risk borrowers as early as possible and should enhance programs to modify existing mortgages in those cases where the borrower has a reasonable ability to repay.

7. Borrower responsibility. Existing borrowers should contact their lender or 1-888-995-HOPE immediately if they are having trouble with their mortgage payments, or are concerned that they may have difficulty.

8. Fannie Mae and Freddie Mac (government-sponsored enterprises, or GSEs), and the Federal Housing Administration. Congress should pass GSE and FHA reform legislation promptly, as the president recommended, so these organizations can contribute to solutions within a safe and sound regulatory framework.

9. Liquidity overall. The Federal Reserve should act to ensure there is sufficient liquidity to finance the economy and that secondary markets function efficiently. That is important to all segments of the economy, but especially to housing.

10. Liquidity in the mortgage market. For some time, the principal source of funds for mortgages has been mortgage-backed securities, or MBS. The MBS market is virtually frozen as of today. Wall Street and investors must create an orderly return to a reliable market for mortgage-backed securities.

No one party bears all the blame for the current market turmoil. All played a part. What is vitally important now is that we all take the initiative to help homeowners in distress.

Bartlett is president and CEO of The Financial Services Roundtable, an association of 100 of the largest integrated financial services institutions in the U.S. He is a former member of Congress and the former mayor of Dallas.

Dalton is president of the roundtable’s Housing Policy Council, former Secretary of the Navy, and a former chairman of the Federal Home Loan Bank Board. The Housing Policy Council’s member companies originate 65 percent of the mortgages for American homebuyers.