A House-passed mortgage reform bill makes it tough for borrowers to get traditional adjustable-rate mortgages that are considered safe enough so lenders don't have to retain 5% of the credit risk when they sell or securitize the ARM.

Originally the bill (H.R. 1728) provided this exemption or safe harbor only for prime fixed-rate mortgages and mortgages guaranteed by government entities. But the House expanded the safe harbor to include ARMs — provided borrowers are qualified at the fully indexed rate at the end of seven years.

So a borrower taking out a 5/1 hybrid ARM with 2% annual interest rate adjustment cap must be able to afford a 9% interest rate.

"There are provisions that limit consumer choice and credit availability for garden variety prime products that have not been associated with any of the problems that previously existed with subprime lending," said Robert Davis, executive vice president for the American Bankers Association. The House passed H.R. 1728 by a 300-114 vote May 7.

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