INDIANAPOLIS - With Indiana ranking 10th in the nation in the number of home foreclosures last month, a committee of state lawmakers appeared eager Thursday to change state laws to discourage abusive practices in the mortgage-loan industry.
Members of the Interim Study Committee on Mortgage Lending Practices and Home Foreclosures were told unscrupulous mortgage brokers who made adjustable-rate loans to high-risk borrowers who had bad credit or were financially naive have contributed to the state's mortgage-foreclosure crisis.
The panel heard more than four hours of Statehouse testimony Thursday from federal and state housing officials, state police, banking experts and a group that assists foreclosed borrowers.
Witnesses painted a grim picture of unregulated mortgage brokers and lenders who extend subprime loans to borrowers who don't understand their monthly house payments may skyrocket as interest rates rise.
The witnesses told stories of loans for homes that were greatly overvalued, forcing borrowers into foreclosure when they couldn't keep up with payments. And they described unethical brokers who encouraged naive borrowers to get over their heads into debt, since the brokers got paid up-front.
Panel member State Rep. Woody Burton, R-Greenwood, who is also a Realtor, called the situation "a disaster waiting to happen."
Judith Ripley, director of the Indiana Department of Financial Institutions, said an estimated 32 percent of subprime adjustable-rate mortgages are scheduled next year to "reset," or revert to higher rates, putting some borrowers in dire financial situations.
Ripley urged lawmakers to pass several changes to state law in 2008, including:
Licensing and regulating first-mortgage lenders. Twenty years ago, Ripley said, most mortgage loans were obtained through banks or credit unions, which are regulated and examined. Now mortgage lending has shifted to largely-unregulated non-depository brokers and lenders, she said.
Requiring mortgage brokers and lenders (if licensed) to be bonded for more than the current $50,000. Intended to compensate borrowers if they are harmed by the broker's or lender's actions, such bonds should be at least $100,000, Ripley said.
Requiring all appraisers and mortgage brokers to undergo FBI background checks.
Requiring simplified one- or two-page disclosure forms for borrowers, available five days before closing, that spell out loan costs at various interest rates.
Adding "financial literacy" to the K-12 school curriculum. "Students leave high school with little or no understanding of basic financial transactions. College students are laden with high-cost credit-card debt. It is little wonder that so many people have been entrapped in the subprime and non-traditional mortgage crisis," Ripley told the committee.
Other possible changes lawmakers discussed included capping the top rate of adjustable-rate mortgages, consolidating the enforcement powers scattered among several different state agencies into one entity, creating a database of mortgage loans to more readily identify unscrupulous brokers and beefing up the civil and criminal penalties for mortgage fraud.
Sgt. Chuck Cohen of the criminal intelligence section of the Indiana State Police contended that mortgage fraud ought to be considered on par with crimes of violence.
"One thing I always to emphasize to prosecutors, juries and judges is that this is a serious crime. You can't see the bruises on the victims; but I've had victims whose marriages dissolved over this, who lost their homes, who lost their life savings," Cohen testified.
A total 4,430 Hoosier homes were in the process of foreclosure last month, or one for every 615 households, according to RealtyTrac a real estate information company.
Florida, with 33,354 foreclosure filings or one for every 248 households, topped the monthly list, RealtyTrac reported.
At its next meeting, on Oct. 30, the committee will attempt to hammer out a recommendation that could be introduced as a bill in the 2008 session of the General Assembly.