The Secretary of the Treasury, speaking on behalf of the President’s Working Group on Financial Markets (PWG-FM), today called for sweeping changes in the way the nation’s mortgage professionals operate. According to Treasury Secretary Secretary Henry M. Paulson, Jr., the PWG-FM has carefully reviewed the weaknesses in markets, institutions, and regulatory and supervisory practices that have contributed to financial turmoil and has developed recommendations to address those weaknesses. In developing its recommendations, the PWG-FM is said to have sought to avoid exacerbating the current strains on markets and institutions or risking unintended consequences.

In general, the recommendations include measures to be implemented by government authorities or market participants that will:

1. Reform key parts of the mortgage origination process here in the United States.
2. Enhance disclosure and improve the practices of sponsors, underwriters, and investors with respect to securitized credits, thereby imposing more effective market discipline.
3. Reform the credit rating agencies’ processes for and practices regarding rating structured credit products to ensure integrity and transparency.
4. Ensure that global financial institutions take appropriate steps to address the weaknesses in risk management and reporting practices that the market turmoil has exposed.
5. Ensure that prudential regulatory policies applicable to banks and securities firms, including capital and disclosure requirements, provide strong incentives for effective risk management practices.

With respect to the recommendations for reforming key parts of the mortgage origination process, Paulson and the PWG-FM are calling for:

• States to implement strong nationwide licensing standards for mortgage brokers.
  
  Editor’s Note: As a first step, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) have already created a nationwide licensing system and database for mortgage professionals; seven states began participating when the system was initially started, and dozens more committed to participate over time.
• Federal and state regulators to strengthen and make consistent government oversight of entities that originate and fund mortgages and otherwise interface with customers in the mortgage origination process.
  
  Editor’s Note: One key step that already has been taken is that the CSBS issued principles-based underwriting guidance on subprime mortgages in July 2007 that was nearly identical to guidance issued earlier by federal supervisory agencies. In addition, a group of supervisors has launched a pilot program to review the underwriting standards and senior management oversight of risk management strategies for ensuring compliance with consumer protection laws and regulations at selected nondepository lenders with significant subprime mortgage operations. The results of these reviews should be analyzed in order to determine whether to continue the project and, if so, how to focus future reviews.
• States to work towards adopting the principles set forth in the guidance developed by the federal regulators for nontraditional and subprime mortgage lending and ensure that effective enforcement mechanisms are in place to deal with noncompliance with such standards.
  

• The Federal Reserve to issue stronger consumer protection rules and mandate enhanced consumer protection disclosures, including disclosures that would make affordability over the life of the mortgage more transparent and that would facilitate comparison of the terms with those of alternative products. State and federal authorities should coordinate to enforce the rules evenly across all types of mortgage originators.
  
  Editor’s Note: To this end, the Federal Reserve is currently engaged in a review of the Truth in Lending Act (TILA) rules for mortgage loans, including consumer testing, and plans to propose new mortgage disclosures based on the results. The Federal Reserve has already proposed changes to the TILA rules to address concerns about incomplete or misleading mortgage loan advertisements and solicitations and to require lenders to provide mortgage disclosures more quickly. Those changes should be enacted once appropriate account has been taken of feedback received over the 90-day comment period. In December 2007, the Federal Reserve used its authority under the Home Ownership and Equity Protection Act (HOEPA) to propose new rules that address abuses related to prepayment penalties, failure to escrow for taxes and insurance, stated-income and low-documentation lending, and failure to give adequate consideration to borrowers’ ability to repay. These rules should be enacted once appropriate account has been taken of feedback received over the 90-day comment period.

In most cases, policy makers’ efforts to promote implementation of these recommendations will require domestic or international regulatory cooperation–and if adopted and implemented–appear to offer valid steps to improve market transparency and disclosure, which ultimately should impact the high levels of real estate and mortgage fraud plaguing consumers and the industry.