WASHINGTON, April 23 (Reuters) - Legislation meant to protect homeowners from costly loans would ban bad practices that have already burned out during the present housing bust and so the plan would do little to restore the housing market, mortgage industry leaders told lawmakers on Thursday.
Wall Street titans like Lehman Brothers and Bear Stearns have been laid low by their bad mortgage bets and home values have seen double-digit declines since the mortgage overhaul legislation began moving through Congress two years ago.
Some of the worst excesses of the housing market have self-corrected since then and tough, new lending rules would only raise costs for prospective homebuyers, several witnesses told a U.S. House of Representatives panel.
"If regulatory solutions are not well conceived, they risk exacerbating a credit crisis that trillions of public dollars have still not resolved," David Kittle, chairman of the Mortgage Bankers Association told the House Financial Services Committee.
The costs of failing mortgages would be spread more evenly among investors, and brokers would be prohibited from steering borrowers toward costly loans under two provisions of the legislation.
Rep. Brad Miller, a co-author of the bill, beseeched his colleagues not to let the mortgage industry dissuade them from passing the kind of tough legislation that might have helped avert the current economic collapse if it had been in place years ago.
"It's hard to argue in favor of sloppy, careless legislation but the nation and the world would have been better off if Congress had passed a bill that we drafted on a napkin," said the North Carolina Democrat who has been advocating for mortgage reform since he was elected to Congress in 2002.
NEEDED REFORM TOO LATE
Easy-to-get subprime loans helped fuel the five-year housing boom that ended in 2006 with home values shrinking, inventories swelling and a record number of families facing foreclosure.
In the aftermath of that housing bust, regulators and lawmakers have questioned the financing system that let so many risky borrowers buy a home.
"Too many homeowners and communities are suffering today because of lax underwriting standards and other unfair or deceptive practices that resulted in unsustainable loans," said Sandra Braunstein, the Federal Reserve Board's Director of Consumer and Community Affairs.
In the time that Congress has been debating the question of mortgage reform, bank regulators have taken matters into their own hands.
Lenders may not offer loans to borrowers who cannot provide proof of income and must collect annual costs like insurance and taxes in a borrower's monthly payments under mortgage rules set by the Fed in July.
The legislation under debate, though, would create even more consumer protections and ensure that borrowers receive a "benefit" from a home loan.
Nettlesome questions such as how to measure the benefit to a borrower have stalled the legislation that was supposed to have been voted on early this month. (Editing by James Dalgleish)