New rules urged for risky home loans

A statewide mortgage task force on Friday recommended new rules to prevent consumers from losing their homes to risky loans they can't afford.

Among the recommendations: banning aggressive sales tactics that "steer" people into more costly loans than they otherwise qualify for; making mortgage fraud a felony; and limiting other onerous payment options.

But the suggestions likely are too late for 17,000 households statewide that are more than three months behind on their mortgages as of Sept. 30.

"The horse was out of the barn already," said task force Chairwoman Carol Nelson, CEO of Cascade Bank in Everett. "We asked what rules, laws and regulations can you put together to make sure you're not in this situation 10 years from today."

Washington is in better shape than most other states when it comes to mortgage delinquencies, according to the most recent survey by the Mortgage Bankers Association. The economy is relatively strong, and median prices for homes in King County have held steady compared with last year. But with thousands of households facing higher interest rates in the next year, the picture is expected to worsen.

The Task Force for Homeowner Security endorsed a proposal to create a special fund to help lower-income homeowners get caught up on their mortgage payments so they can refinance into better loans. Such a fund would require the Legislature's approval.

The 17-member group, appointed in September by Gov. Christine Gregoire, represents a mixture of industry and consumer interests.

Its members recommended curbing two options commonly included in the kinds of subprime loans associated with high rates of foreclosure nationwide.

The group recommended a ban on deferred interest or "negative amortization" options in subprime loans that allow homeowners to pay only part of the monthly interest. The option allows for low monthly payments, but thousands of homeowners who took out loans based on the low payments realized they couldn't afford their homes once they had to start paying for the deferred interest.

Also targeted: "prepayment penalties" or fees that kick in if a loan is paid within a certain period, typically three years after it's sold.

Prepayment penalties should expire at least 60 days before any scheduled interest-rate increase, the group said. That would give borrowers a chance to obtain new mortgages without being unfairly trapped in a mortgage they may no longer be able to afford.

The group also suggested that lenders and brokers be required to disclose loan terms in easily understood language on a single-page form. The information would be given to customers within three days of their loan application, instead of near the end.

It also recommended better financial education and increased access to financial information through "qualified" counselors.

Gregoire, who made a brief appearance at the meeting, said she would announce Monday which recommendations she would endorse.

Susan Kelleher: 206-464-2508 or skelleher@seattletimes.com