The House and Senate may still be on summer break, but the battle lines are growing sharper every day in Washington on one key real estate and mortgage issue that will be front and center in September: Should Congress create a new federal agency that does nothing but protect consumers from high-risk mortgages, bad lenders and real estate settlement rip-offs?

Last week, in an unusual move tied to possible congressional action next month, half of the country's state attorneys general weighed into the debate and said, "yes," we need more muscle from the feds.

Before heading back to their districts, congressmen and senators got an earful from opponents of the idea. Most banking and mortgage industry lobbyists argued that creating a new agency would just gum up the works, add a new layer of bureaucracy, and raise costs.

Consumer groups disagreed, pointing to the regulatory failures of federal agencies on abusive mortgages earlier this decade, which have led to record foreclosure rates.

In a joint letter to the chairmen of the House and Senate financial services and banking committees, the attorneys general last week sided with the consumers.

"Congress should support additional enforcement resources to fight fraud at all levels of the financial marketplace," said the attorneys general. "The current financial crisis has demonstrated the need for comprehensive and effective consumer outreach at the federal level."

The Obama administration has strongly supported the idea of a specialized new agency, and House Financial Services committee chairman Barney Frank is poised to move legislation out of his committee and to the House floor in September.

Frank's bill, which is based on the White House's plan, would have huge impacts on virtually everyone involved in home real estate or mortgages. The agency would be given broad oversight and enforcement powers on all home loan products offered nationwide - whether from small local brokers or giant banks.

It would have the power to impose tougher underwriting requirements for mortgage financings the agency considers high-risk, for example, piggyback combinations of first and second mortgages, loans with negative amortization terms and even loans with adjustable rates.

The agency would also have full federal responsibility for overseeing the Real Estate Settlement Procedures Act, including complex "affiliated business" relationships among realty brokers, title companies, home builders, escrow and settlement agencies and mortgage brokers.

The White House and congressional supporters say they intend to pass the controversial legislation this Fall. The banking industry says no way.

Realty Times will keep you on top of this important legislation as it moves or stalls on Capitol Hill in the weeks ahead.

Published: August 24, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.