updated 5/8/2007 6:16:40 PM ET 2007-05-08T22:16:40

Congress is looking at potential reforms to risky home lending practices, although a House subcommittee hearing on Tuesday suggests lawmakers are still sorting out the complex workings of the mortgage market and wondering whether reforms will be necessary or helpful.

With the number of foreclosures nationally jumping 47 percent in March from a year ago, lawmakers are weighing whether new lending rules are needed or whether the market is already in the process of self-correcting. The task of crafting reforms is made more complicated by the long list of players involved in mortgage transactions.

“There is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind,” said Rep. Melvin Watt, D-N.C., at Tuesday’s hearing of the House Subcommittee on Financial Institutions and Consumer Credit.

Watt and other committee members said Congress needs to avoid unintended consequences of trying to fix the housing market.

“It’s kind of like the Pillsbury dough boy,” Watt said. “If you push in one place, it juts out somewhere else.”

Their concerns were echoed by Rep. Carolyn Maloney, D-N.Y., the subcommittee’s chairwoman, although she made clear that Congress is willing if need be to address the issues.

“This committee is by no means waiting for the private sector to do what it thinks is right to solve this rapidly growing crisis,” she said.

Last week, Sen. Charles Schumer, D-N.Y., Sherrod Brown, D-Ohio and Bob Casey, D-Pa., introduced a bill that would mandate tougher federal standards for mortgage lenders even as Senate Banking Committee Chairman Christopher Dodd, D-Conn., was emphasizing that increased regulatory oversight and voluntary reforms by lenders are preferable to legislation.

The mortgage industry, in general, has argued that reform could restrict lending in the near term, hurting low-income borrowers --the intended beneficiaries.

Still, Cara Heiden, president of Wells Fargo & Co.’s mortgage lending division, testified Tuesday in favor of federal lending standards and national regulation of mortgage brokers.

Wells Fargo, she said, already has a ban on risky lending practices, including, for example, loans on which the principal balance can increase over time.

Big financial institutions and Wall Street investment firms have in recent years increasingly bought home loans in bulk from banks and other lenders and bundled them into securities to be sold to investors, theoretically spreading risk and helping provide more funds for lending.

Critics say the creation of this secondary market in mortgages caused housing lenders to be too lenient in evaluating high-risk or subprime borrowers. Instead, they argue, mortgage brokers and banks approved mortgages as quickly and as often as possible so they could profit from the huge demand for securitized mortgages.

Consumer advocates say investors in bundled or pooled mortgages should be held legally accountable for encouraging lax lending practices. They argue that mortgage-holders should file lawsuits against investors and mortgage lenders if there’s proof that their actions were illegal or abusive.

But industry representatives say investors, who had no direct role in loan approvals, can’t be held legally responsible for creating excesses in subprime lending.

Several lawmakers warned against overzealous reform efforts, citing Georgia’s experience as a textbook case. A predatory lending law was enacted in the state in the fall of 2002 that allowed borrowers to seek punitive damages from anyone who bought a loan or a security that included the loan.

In response, the three major credit-rating agencies decided they would no longer rate the credit quality of securities containing Georgia home loans. More than 25 lenders pulled out of the state in the wake of the credit agencies’ move.

Georgia’s legislature subsequently adopted a law limiting liability for loan abuses to original lenders.

If Congress isn’t careful, said Rep. Spencer Bachus, R-Ala., “it will harm low- and middle-income Americans and their ability to finance and purchase a home.”

Some lawmakers, however, expressed frustration at the hearing that Congress can’t tackle the issues head-on.

“We agree that there is a problem, but we don’t want to do anything about it it seems,” said Rep. Al Green, D-Texas.

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