The State House was the setting for a hearing last Wednesday regarding legislation aimed at solving Massachusetts’ burgeoning mortgage crisis.

A hearing was held at the State House last Wednesday to discuss legislation Gov. Deval Patrick filed in an effort to fix Massachusetts’ burgeoning mortgage crisis.

Criminalizing mortgage fraud, requiring that consumers get 90-day notice of their right to cure a defaulting loan before it forecloses, and requiring pre-loan counseling for people considering nonprime adjustable-rate loans are key provisions of the bill, H. 4085, which Patrick filed in June.

At the hearing, administration officials argued that its provisions must happen fast to make a difference, while mortgage industry representatives warned legislators that some proposals are “duplicative” or could hurt borrowers.

“We believe there will be critical unintended consequences” if certain provisions in Patrick’s bill, or one of a “myriad” of other legislative and regulatory proposals to help prevent foreclosures in the future, become law, Massachusetts Mortgage Association Executive Director Denise Leonard told the Joint Committee on Financial Services, which considered the bill along with several others.

MMA is most upset about H. 4085’s mandatory counseling provision, which would prohibit a lender from making a nonprime adjustable-rate loan on an owner-occupied home unless the borrower first receives counseling from a third-party nonprofit agency and affirmatively opts into the loan.

“This could cause lenders to simply stop offering adjustable-rate loans,” Leonard said.

Nonprime loans make up about 15 percent of the national mortgage market.

“I hope we don’t Â… eliminate the ability of people who deserve to be in properties, to get in them,” added Massachusetts Mortgage Bankers Association board member Amy Tierce.

Tierce and Leonard said lawmakers should take into account the fact that the mortgage industry has imposed stricter guidelines on itself in recent months – and be careful not to enact provisions that could put brokers and lenders out of business.

National mortgage lenders do plenty of business in Massachusetts, Tierce said, and it would be a bad idea to make the business climate for them here worse than it is elsewhere.

“Community banks are not going to be able to make all the loans required to keep our real estate economy going,” she warned.

‘Deeply Concerned’

Bristol County Savings Bank President and Chief Executive Officer E. Dennis Kelly, board chairman of the Massachusetts Bankers Association, said community banks didn’t cause the vast majority of foreclosures in Massachusetts. (Lenders here filed 19,487 foreclosure notices against homeowners in 2006, compared to 17,000 such filings in 1991, when a real estate crash caused a spike in foreclosures nationwide.)

Foreclosures generally have been attributed to interest rates resetting on subprime loans even as home values decrease.

“As of Aug. 31, we had one mortgage loan out of 1,502 [on our books] that was 60 days past due,” Kelly said. That represents $225 million in loans; the bank keeps approximately half its loans on its books.

Kelly said he could recall a Federal Deposit Insurance Corp. exam of his $1.1 billion mutual bank just two years ago, during which examiners asked whether Bristol County Savings was doing “nontraditional” loans such as option adjustable-rate or interest only loans.

“Our answer was no,” he said. “And among community banks, we are not unique.”

Kelly said later that banks aren’t looking, per se, to be exempt from proposals such as Patrick’s, but added that he thinks “it’s important for the Legislature to [realize] that this problem is Â… in another part of the market.

“Unfortunately,” he said, “when you have a problem, you overreact.”

Kelly said Bristol County and other community banks already offer loan counseling, in partnership with local nonprofits, to first-time homebuyers. Some of his bank’s most “sophisticated” borrowers, who know they plan to stay in a home only a few years, choose adjustable-rate loans, he said.

Mandatory counseling provisions should be based on the type of borrower rather than the product, he suggested. MBA’s written statement on H. 4085 says the trade group is “deeply concerned” that the mandatory counseling provision could have a “chilling effect” on products banks are offering today.

After last week’s hearing, Rep. Ronald Mariano, D-Quincy and House chairman of the Financial Services Committee, said he believes most borrowers either were victims of predatory lending practices or unsophisticated. Assertions by some brokers and lenders that certain borrowers made deliberate misstatements in order to get into a home they couldn’t afford are “self-serving,” he said.

The committee has been working for several months trying to address Massachusetts’ foreclosure problem in a “comprehensive manner,” without being duplicative, Mariano said. His staff has been talking with the Washington, D.C., office of U.S. Rep. Barney Frank, D-Mass., about federal actions taken to address foreclosures, and making sure they have a handle on state programs already in place to help borrowers and first-time homebuyers in trouble.

Mariano said the staff is trying to craft a bill or add amendments to existing legislation that would include the best of all suggestions, and perhaps a few not yet considered. He declined to say what those might be, explaining, “We want to make sure they’re constitutional.”

One proposal he singled out as likely to make it into finalized legislation will direct the Division of Banks to participate in the creation of a national database, made up of individual mortgage originators and their employers, which would include foreclosure activity patterns.

Such a database would help reduce fraud that can spread relatively unchecked today, Mariano said, when an originator with problems in one state can simply move to another.

The Division of Banks already is working with other states to create such a database, which is expected to debut in early 2008. Another bill before the Legislature, S. 2296, would require it. Mariano said the legislation, which he expects will be reported out of committee by the end of October, very likely will include it.

Department of Housing and Community Development Undersecretary Tina Brooks said state officials have taken many steps, just in the past few months, to defuse foreclosures’ “destabilizing impact” on Massachusetts neighborhoods. H. 4085 is one of them, she said. The Division of Banks also recently established new, higher net-worth requirements for both mortgage lenders and brokers.

Another such effort came in the form of a new rescue-loan product introduced by quasi-state agency MassHousing in July. The product, directed at Massachusetts homeowners who were victims of predatory lending in recent years, was funded with $190 million from federal government loan guarantor Fannie Mae and $60 million from MassHousing.