Set state standards to rein in brokers

A 2007 report by The Wall Street Journal found that more than half of subprime mortgages in 2005 and 2006 went to homebuyers who qualified for conventional loans with stable interest rates.

The findings undermine the stereotype that the subprime crisis was fueled solely by people with poor credit who had no business trying to buy a home.

In some cases, borrowers signed up for adjustable-rate mortgages assuming they could refinance before interest payments ballooned. But The Journal's analysis also spotlights the role of unethical mortgage brokers who aggressively steered first-time homebuyers into debt traps, and ultimately foreclosure, without explaining the risks.

Virginia legislators will consider a measure this year that would bolster consumer protections by creating a legal obligation for mortgage brokers to act in the best interest of the borrower by, at a minimum, providing them with a full range of options and disclosing the pros and cons.

The legislation also would make it easier for borrowers to sue in cases in which a mortgage broker acted in bad faith but there is insufficient evidence of fraud.

State officials should be under no obligation to protect people who fail to shop around for reasonable rates and neglect to read the fine print on loan contracts. But the complexity of mortgages is a good argument for making brokers more accountable to their clients.

In fact, state law lays out extensive obligations and continuing-education requirements for real estate agents and attorneys, but it provides only minimal standards for brokers, an exception that makes little sense.

The fact that mortgage brokers are free agents adds to the urgency for stronger protections. Unlike mortgage lenders, who are attached to a particular bank or lending institution, brokers shop around for their clients from a menu of lenders. A mortgage lender is still around to bear some of the responsibility when a loan goes bad, but brokers collect their commissions and move on to the next client.

Most brokers do their best to find the most appropriate loan for an individual or family, but some deliberately push clients toward riskier loans.

Because loans designed for people with shaky credit often involve more paperwork and have a higher rate of refusal, lending institutions offer higher commissions to brokers. Wholesale Access, a research firm, found the average commission for subprime loans was 1.88 percent, or $7,520 for a $400,000 loan, compared to 1.48 percent - $5,920 - for traditional mortgages.

While subprime loans can play a role for a handful of homeowners, they have been widely abused, and unethical brokers bear much of the blame.

This year's legislation has the support of Housing Opportunities Made Equal, a nonprofit that fights housing discrimination and counsels people facing foreclosure. The group regularly encounters victims of sleazy mortgage brokers, including a woman on a fixed income who was talked into taking an adjustable-rate mortgage that raised her interest rate after just one month.

Lawmakers need to keep a careful eye on mortgage reforms being considered by Congress and coordinate with those national efforts. But state leaders should not dismiss the problem as someone else's mess to clean up.

The Pew Charitable Trusts forecast that Virginia will experience more than 62,000 foreclosures in 2008 and 2009. The resulting decline in home values affects everyone. The housing market will not recover until consumers regain confidence in the industry.

Improved mortgage broker accountability is the right place to start.