In the mid-1980s, when Melissa and Alan Bean bought their first home, in Elmhurst, they didn’t know until after they had signed all the papers that they had taken out a very risky mortgage, one that included a provision for “negative amortization”—the alluring possibility of paying less per month than the interest accrued. (A loan like that can quickly turn into an upside-down situation, where the homeowner owes more than the house is worth.) It was a mistake the couple corrected as soon as they understood what they had done.

Two decades later, Melissa Bean, now representing Illinois’ 8th District, (Chicago’s northwest and far north suburbs) in the U.S. House of Representatives, is trying to help correct the effects of high-risk mortgages on the national economy. Last October she introduced in the House the Protecting Access to Safe Mortgages Act to increase the lending capacity of Fannie Mae and Freddie Mac, the two government-sponsored home lenders. (Action on that bill is still pending.) And this week, she called on the Senate to act quickly on mortgage reforms that the House has already passed. Those reforms include:

  • cracking down on several kinds of risky loans and instituting tight rules on mortgage underwriting in hopes of eliminating the too-easy lending that contributed to the present crisis in mortgage defaults;
  • allowing the Federal Housing Administration to lend at better rates to large numbers of homebuyers who in recent years were shunted into subprime loans;
  • an expanded definition of jumbo mortgages so more borrowers can get the lower rates that make buying homes attractive.

On Tuesday, just hours after the Bush administration and six major national banks unveiled a program to stall foreclosure for many struggling homeowners, I spoke to Bean about the ongoing mortgage crisis.

Deal Estate: You’ve said that now that the two houses of Congress and the White House have agreed on an economic stimulus package, you want to warn the Senate not to forget mortgage reform. What do you mean?
Melissa Bean: In the House, we passed our mortgage reform bills last year, before this stimulus package came up. The stimulus package is a reaction to the faltering economy, but you need to make the reforms that address what caused the problems. In the Senate, they’ve done the stimulus package but they still haven’t gotten to mortgage reform. We need that as part of the solution to the problem.

DE: Why has the House been ahead on this?
MB: Barney Frank [of Massachusetts], who’s the chair of the Financial Services Committee, understood ahead of the curve that we had to get going on it. He’s been assertive on this for a long time. But talking to Senator [Richard] Durbin and Senator [Christopher] Dodd [the Connecticut legislator who chairs the Senate Banking Committee], they’re now moving quickly to get going on their half. I think everybody appreciates how important these reforms are now.

DE: Why are the reforms important if all those bad loans have already been made?
MB: The reality is that, now with a tightened credit scenario, there’s less likelihood that loans that can’t be paid for would even be written. However, we need to help rebuild confidence in the market, show that the reforms will be in place in the future so liquidity and capital come back into the mortgage market.

One of the things in the mortgage bill is that we require licensing and regulation of all loan originators. Some states already do that, but it hasn’t been federal. And the preponderance of the loans written didn’t adhere to traditional underwriting standards and ability-to-pay models. They haven’t been regulated. So an important element of the reforms is to give consumers confidence in the mortgage industry again, and to ensure to the [entities that buy up mortgage portfolios on the secondary market] that what they’re investing in is worth what they thought it was.

We have a number of consumer protections built in, to eliminate some of the things that contributed to the problems—things like no-documentation loans and the drive-by appraisals. This will cure some of the predatory practices, the riskier practices, and create better oversight and accountability. That will allow credit to flow and encourage homeownership in the long term, not just get people buying houses who turn out to not have the ability to pay and keep the home.

DE: Do you think the mortgage crisis will become an issue in the presidential race?
MB: There’s no question that the economy is top-of-mind, not just here in my district but across the country. The presidential candidates will have to speak to the financial insecurity people have. A big part of the personal portfolio that most people have is, obviously, their home, and candidates will have to address the health of that.

DE: When you were running for your seat almost ten years ago, could you have imagined that the housing market would become such a hot issue for Congress?
MB: I was talking to local papers way back then and I said people have uncertainty. It’s not just unemployment, it’s pensions and the cost of college and the value of their homes and the fact that many people are over-extended, they have higher personal debt than they have ever had. I was raising this even before I came to Congress, and then I got here and found there were those on this committee, like Chairman Frank, who were already trying to address it.