Stashed away in a drawer somewhere on Capitol Hill is a simple piece of legislation that would have done much to stop the mortgage mess, robo-signing, unfair foreclosures, and the growing claims against lenders. But Congress has not touched the Produce the Note Act since it was first introduced in February 2009 -- nearly two years ago.
Now, with this session of Congress drawing to an end, the chance of a hearing, consideration or a vote has dropped to just about zero.
Where's The Note?
Sponsored by Rep. Marcy Kaptur (D-OH), the legislation would require lenders in a foreclosure situation to identify the actual owner of the mortgage note, the originating mortgage lender and all subsequent loan owners. In other words, in the same way a title search is used to assure that property owners actually have the right to sell a house, the Kaptur bill would require lenders to show they have title to a loan before they can foreclose -- a requirement which is supposed to already be part of every foreclosure claim.
This should not be a big deal. After all, we plainly know who originated the mortgage -- that would be the lender who sat with you at closing and collected a fee for their work.
And if the loan was sold then surely someone, somewhere has a record showing the date of sale and the purchase price each time the loan was sold and re-sold. After all, we know who owns 100 shares of IBM no matter how many times it has been traded.
Or maybe not. There was, after all, the New Jersey mortgage broker who allegedly took in $11 million by repeatedly selling the same loans to Wall Street.
The Kaptur legislation would require lenders to detail whether any terms of the mortgage were unfair or deceptive. That's necessary because the Federal Reserve has the authority as a regulator serving the public to prohibit "unfair and deceptive acts or practices" under the Home Ownership Equity Protection Act of 1994. However, it did not bother to do so when option-ARMs and interest-only mortgages were first marketed. Such loans, of course, are at the heart of the mortgage meltdown, the foreclosure crisis and lender losses on Wall Street.
The Kaptur bill would also force lenders to state as part of the foreclosure process whether any material misrepresentations were made to borrowers when a loan was originated and whether borrowers actually benefited when refinancing in terms of a lower rate, smaller monthly costs or more stability, such as going from an ARM to a fixed-rate mortgage.
Subprime Borrowers Overqualified
The misrepresentation requirement is important because huge numbers of subprime borrowers -- the borrowers with the steepest foreclosure rates -- in fact qualified for conventional, FHA and VA financing. Conventional, FHA and VA mortgages are cheaper and less toxic than the subprime loans borrowers were sold, and traditional loans are not loaded with prepayment penalties, huge payment increases and other hazards. According to the Wall Street Journal, 55 percent of all subprime borrowers qualified for better financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)
Kaptur -- a Democrat who swam against the Tea Party tidal wave and won re-election with 59 percent of the vote -- can try again in the 112th Congress, which starts next year.
Published originally on OurBroker.com, a leading source of real estate, mortgage and foreclosure news and information.