A last minute alternative plan attempting to save the Wall Street reform bill was agreed to by the lawmakers after disagreements about taxing large banks and hedge funds could have almost certainly threatened the passage of the bill in the House when it comes up for voting later this week before the July 4 recess. The death of Democrat Senator Robert Byrd who was expected to vote for the bill and the threat of withdrawal of support for the bill by key Republican Senators who supported the earlier version of the reform bill almost derailed the reform bill.

The lawmakers framed an alternative plan that seeks to redirect bailout repayments as well as untapped dollars from the $700 billion federal bailout program called the Troubled Asset Relief Program (TARP) to offset shortfalls created by the Wall Street reform bill to pay for the creation of new agencies as envisaged in the bill.

The move would offset $11 billion in spending. The biggest banks (more than $10 billion in assets) would also have to face increased premiums for taxpayer-backed federal insurance on their commercial deposits, a move that would offset roughly $5.7 billion of the bill’s costs.

If passed by Congress, the proposed regulatory reforms are expected to curb predatory lending. Experts say that this is likely to make mortgages more expensive and more difficult to get. The new rules put the onus on financial institutions to ensure that the borrowers can afford to repay the mortgages taken by them. Including in the case of adjustable rate mortgage where the payments vary when the interest rate changes.

The rules would also ban banks from using incentives to sell borrowers costlier loans when they could have qualified for cheaper loans. This was one of the controversial practices that propelled the boom of subprime lending. The reform package also prohibits prepayment penalties for adjustable rate, subprime and other risky loans and limits them to three years for traditional loans. This would help prevent borrowers from being locked into expensive loans.

Securing a mortgage to get tougher: - While bankers and consumer advocates differ on the bill’s impact on mortgage availability and cost, one thing is for certain: It would take more work to get a home loan.

Under the ambit of these rules, the lenders will revert to prudent lending standards; something that was not in much evidence in the making of the housing bubble. What this means is that the consumers should have the capacity to make some down payments as well as have creditworthiness that they can afford the mortgage to be able to get a loan. Also, documentation regarding pay, tax returns and other such documents to establish solvency, credit worthiness and capacity to repay

In the aftermath of the financial crisis, lenders have increasingly made such common sense practices a standard operating procedure.  These rules will serve to codify them to avoid reckless lending spree in the wake of a strong demand in housing in the future

If the bill passes, the mortgage industry’s proposed regulator, the Consumer Financial Protection Bureau will formulate  the new rules as well as set standards on down payment size, credit scores and total debt-to-income levels after which the industry to institute them and is likely to take up to two years.

But one thing is certain; mortgages will continue to be harder to get in the near future.

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