Senate Targets Mortgage-Broker Bonuses and 'Liar Loans'

Two of the most abusive practices that helped inflate the housing bubble -- stated income loans and broker bonuses for steering people to more expensive loan programs -- were harpooned by the U.S. Senate on Wednesday.

The Senate passed an amendment to the financial reform legislation by a vote of 63 to 36. The amendment was introduced by Senators Jeff Merkley (D-Ore.) and Amy Klobuchar (D-Minn.). Sen. Carl Levin (D-Mich.), pictured at left, was one of its co-sponsors.

Senate investigations of Washington Mutual show how these types of compensation packages rewarded loan officers and processors on volume and not on the quality of the loans they were writing. Brokers were "paid more for issuing higher risk loans." They also got paid more "when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate." This practice enriched Washington Mutual, but "made defaults more likely down the road."

While it's great that these "liar loans" might no longer pollute our financial system, some people could be hard hit by a ban.