The mortgage crisis is threatening to send the U.S. economy into a tailspin, and Uncle Sam has taken notice. Or rather, his sundry nephews have: State regulators say they are more likely to make mortgage legislation a top priority over the next two years than any other banking regulation, according to a recent survey conducted by the Aite Group. Indeed, a related report says that at least 176 mortgage bills are currently pending in state legislatures, 17 percent of which are related to consumer protections. And the number is set to grow. But the time to stop the crisis, some say, was several years ago.

The bills cover a variety of different initiatives, but by and large echo the common themes of increased disclosure, fee limitations, and stricter rules governing how lenders determine borrowers’ ability to repay loans. If enacted, they could safeguard both unwary consumers and lenders from bad loans. “In a perfect world, the lender will earn a profit off of the money they offer, and the customer will be able to repay the loan,” says Aite Group analyst Eva Weber, author of the reports. But some say the new regulatory focus on mortgage lending is too little, too late. “It might be good legislation, although it is fighting the last war. We will not have banks throwing money at poor people again any time soon,” says Dean Baker, co-director of the Center for Economic and Policy Research, or CEPR.

As the housing market heated up, some sub-prime lenders got creative with their mortgages, scrapping key elements of income checks and offering buyers zero-down payments or principal-free introductory periods. At the same time, the Federal Reserve kept interest rates low, and federal and state initiatives encouraged low- and moderate-income residents to invest in housing. As housing prices rose 70 percent over inflation in just over a decade, more would-be homebuyers were forced into the sub-prime market. Last year, a full quarter of home loans were sub-prime, according to CEPR.

And now the damage is done. This year, foreclosure filings are set to exceed 2.2 million, more than 2.5 times that of 2005, according to realtytrac.com. And the market looks set to adjust on its own as dozens of mortgage lenders have gone belly up, making sub-prime lending an unattractive option to anyone who wants to stay in business. For any financial institution that wants to follow in bankrupt lenders footsteps, many of the bills would add checks to the loan process. CEPR’s Baker says what’s more urgently needed is legislation that would protect homeowners who are unable to repay their mortgages.

A handful of states have stepped up to the plate with back-end foreclosure legislation. This year, New York and Massachusetts, among others, introduced foreclosure bills which would provide additional funds to prevent homeowners from defaulting on their loans, according to the National Conference of State Legislatures. Maine was the first of the states to enact such legislation: The Maine State Housing Authority can now make a loan to a financial institution to assist a homeowner who is in default.

While the back-end legislation stands to help the increasing number of homeowners facing foreclosure, many of the front-end mortgage protections would only prevent the relatively few mortgage lenders — those apparently blind to market forces — from making untenable loans. But the increased mortgage safeguards won’t come without a cost. Regulatory changes can be expensive for financial institutions, which have to comply with different rules in different states. Of the 17 banks surveyed by the Aite Group, 82 percent said they expected state-level compliance demands to become significantly more stringent in the next three years.

Congress has stepped in with bills that could pre-empt some of the potentially costly state legislation. The most promising bill, dubbed the Mortgage Reform and Anti-Predatory Lending Act of 2007, passed in the House in late November. If enacted, the bill would set federal standards to determine consumers’ abilities to repay loans, limit fees, and increase disclosure requirements for higher-risk loans.

Even if the Mortgage Reform Act becomes law, some states will likely enact more stringent consumer protections both at the front and back ends. “In some form or the other you’ll see a lot of the consumer protections pass,” says Aite Group’s Weber, noting that many of the disclosure provisions look promising. And, she adds, “I’m sure we’ll see something, offer some kind of hope for [current sub-prime] mortgage holders.”

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