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New Indiana law aims to promote safety of traditional loans

May 22, 2010

A new state program is encouraging lenders to promote the stability of their conventional mortgages to help Indiana’s housing market rebound from a foreclosure crisis instigated by risky loans.

The General Assembly approved legislation last session allowing the Indiana Department of Financial Institutions to offer a five-star certification program that touts the strength of traditional mortgages.

Starting July 1, banks and mortgage brokers will be able to advertise their mortgages as five-star state-certified if they join the voluntary IDFI program and adhere to its requirements for mortgage terms.

Those conditions, trampled by subprime lenders who fueled the housing bust, include:

• 10-percent down payments or, in the case of a refinancing, 10-percent equity

• a fixed interest rate

• provision of escrow accounts for payments of taxes and insurance

• terms that don’t exceed 30 years

• no prepayment penalty or fee.

State Rep. Ed DeLaney, D-Indianapolis, originally proposed the bill and hopes both banks and mortgage brokers will embrace the program.

“This is the opposite of the so-called ‘ninja’ loan or ‘liar’s’ loan,” DeLaney said. “It’s all aimed at reducing the risks of the homebuyer in getting the mortgage.”

But the Indiana Bankers Association isn’t sold on the new law. The association stopped short during the legislative session of giving the bill its full support and instead took a “neutral” stance, questioning whether the program is even necessary, said Amber Van Til, vice president of government relations.

“These are products that every bank already offers,” she said of the conventional 30-year mortgage. “That’s our ideal product for our ideal customer.”

She applauded DeLaney for allowing the association to suggest changes to the legislation and for attempting to provide consumers with additional information about the mortgage process.

Still, concerns remain. Perhaps the most glaring of all is the name of the program itself. Mark Tarpey, supervisor of IDFI’s consumer credit division, said a new moniker likely is in the offing, because some banks have the word “star” in their titles, which could cause confusion.

The five-star name also gives the appearance that a bank is rated, Van Til said.

“You don’t want to designate a financial institution at a star level,” she said. “We don’t want someone to think that if they don’t have the [five-star designation] on the door, they’re not a good bank.”

The department is coordinating efforts to unveil the five-star program with the IBA, the Indiana Mortgage Bankers Association and the Indiana Credit Union League.

It is preparing to have guidelines available by June 1 to give banks and mortgage brokers at least a month to digest the program before it takes effect, Tarpey said.

Lenders are under no obligation to participate. Those that are interested in marketing the program will need to submit the necessary paperwork to IDFI to become certified.

Banks that sign up will be charged an annual $50 certification fee, which could generate new revenue for the state, according to the law’s fiscal impact statement.

Those that offer five-star mortgages must give any would-be borrowers they reject written statements of the reasons they don’t qualify. A lender that fails to comply with the program’s requirements will not be penalized but simply will not be able to promote itself as a participant.

Tarpey is uncertain how much interest the program will spark from the lending community, though he recognizes 30-year mortgages are a “good thing.”

Morris L. Maurer, president of The National Bank of Indianapolis, is undecided on whether he will participate.

“As far as the five points go, 99 percent of what we do fit those points,” Maurer said. “We don’t try to do some of those toxic mortgages at all, never did.”

Many mortgage lenders stopped offering “the exotic things that were out there a few years ago,” Tarpey said. But as the economy gains steam and the housing market starts to rebound, he’s seeing an uptick in alternative mortgages.

“Variable rate is not always a bad mortgage,” he said. “Unfortunately, for some people, they didn’t realize what they were getting into.”

The proliferation of subprime mortgages created a wave of questionable loans containing interest-only options or pre-payment penalties that contributed to the housing meltdown.

But Van Til said fixed-rate mortgages requiring a 10-percent down payment are difficult for some borrowers to get unless they are selling an existing home or they have savings to pay the amount.

Those who can’t afford the down payment still will need private mortgage insurance or other products from a bank to enable them to purchase a home, Van Til argued.

“You’ve got to have money to put down,” she said of the program. “But we haven’t lived in that world for a long time.”

Despite its potential flaws, the bill could have an upside for Hoosiers. The law allows the mortgages to be securitized, giving lenders the ability to package them as “attractive” investments, the bill’s author, DeLaney, said.•

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