Legislative Efforts See Little Progress in Foreclosure Crisis

Monday, June 9, 2008
Mark Lifsher
KnowledgePlex

As the worst foreclosure crisis since the Great Depression drags down the California economy, the Legislature is making only limited progress this year on proposals for sweeping changes in the home mortgage industry.

Amid fanfare this winter, lawmakers held televised news conferences and introduced an unprecedented number of bills that would more heavily regulate mortgage bankers, brokers and servicers and tighten lax lending practices that put unqualified people into houses they couldn't afford.

Some legislation has been approved by the Assembly or the Senate, but other bills have run into a buzz saw of opposition from lobbyists. Bankers, mortgage brokers and Realtors are a powerful combination in Sacramento, and their clout may yet stall or substantially modify many of these proposals.

Bankers argue that California cannot regulate its way out of the current mortgage crisis.

They've won a few skirmishes, compromised on some and are fighting other proposals that they claim would make it difficult for Californians to qualify for future mortgages.

"There certainly is a role for government in broker regulation," said Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn. "But they need to act with caution and not scare away capital."

Meanwhile, problems on the housing front seem to have worsened. Last week, it was reported that the numbers of mortgage delinquencies and foreclosures are at record levels nationally. The percentage of all mortgages at least 30 days past due rose to 6.35% in the first quarter from 5.82% in the fourth quarter of 2007, according to the Mortgage Bankers Assn.

Such stark numbers have increased some lawmakers' sense of urgency and raised the political stakes in Sacramento.

"I think we're addressing the core issues that caused the mortgage meltdown," said Assemblyman Ted Lieu (D-Torrance), the author of a key bill and chairman of the Banking and Finance Committee.

A major showdown between the battling interest groups is expected June 18 when the state Senate Banking, Finance and Insurance Committee will hear at least 10 mortgage-related bills that have won approval from the Assembly.

California is the largest and one of the hardest-hit states trying to relieve the spreading mortgage pain.

One out of 20 homeowners has been notified of a possible foreclosure, according to an April report by First American CoreLogic Inc., a unit of First American Corp. in Santa Ana. With steep declines in home prices, the state is home to eight of the country's 10 highest-risk housing markets.

If these bills working their way through Sacramento become law, California could become a national leader in tightening controls on mortgage lending, said lawyer Ellen Seidman, who ran the federal Office of Thrift Supervision during the Clinton administration and is a Chicago-based consultant on housing issues with the nonprofit New America Foundation.

Needed reforms, she said, include screening people before a loan is issued to ensure they can afford payments and banning steep penalties that make it hard for homeowners to refinance high-interest adjustable-rate loans.

"It's going to take some state going first, doing something meaningful," Seidman said.

Lawmakers in Sacramento say they already are stepping up to the plate by attacking an economic ill that is fueling high unemployment and billions of dollars in budget shortfalls for state and local governments.

But consumer groups, which welcomed Lieu's proposals when they were introduced last winter, now say they're disappointed. Some of the bills have been watered down by compromises that Lieu and his colleagues made to try to overcome opposition.

"This is business as usual, when the problems facing California are anything but," said Paul Leonard, director of the Center for Responsible Lending, an Oakland nonprofit consumer group.

Industry and consumer groups have been able to agree on all or parts of some of the original mortgage-related bills.

"Our mission is not to kill every bill. We certainly want to work with the Legislature," said Hobbs of the California Mortgage Bankers Assn.

One measure, SB 1137 by Senate President Pro Tem Don Perata (D-Oakland), requires lenders to repeatedly try to contact homeowners who may be in danger of defaulting to stave off a foreclosure. The bill also provides renters living in foreclosed properties more time to find a new home.

"The bill can take effect quickly and provide some real short-term benefits to borrowers, to renters and to communities that are faced with blight from foreclosures," Leonard said.

Hobbs credited the bills' negotiators for "absolutely increasing borrower and servicer communication" while jettisoning an earlier provision requiring face-to-face meetings that he called unworkable.

But negotiations on other mortgage-related bills have been less fruitful. Assemblyman Lieu succeeded in winning passage in his house for his measure, AB 1830, but only after taking a substantial amendment from the bankers.

The bill, as currently written, prohibits prepayment penalties on mortgages and requires lenders to evaluate borrowers' financial wherewithal to make monthly payments. It also bans banks from paying brokers special commissions to lock clients into more expensive loans than they might be qualified to get.

The bankers' amendments, however, limit the restrictions to sub-prime loans given to people with risky credit histories and not other types of adjustable-rate mortgages such as interest-only loans.

Bankers were equally successful in stripping wording from AB 2359 by Assemblyman Dave Jones (D-Sacramento) that would have made secondary market investors partially liable for damages caused by bad loans in their portfolios. They also helped kill AB 2880 by Assemblywoman Lois Wolk (D-Davis), which would have held mortgage brokers to a set of fiduciary duties toward clients.

Bankers weakened AB 2740 by Assemblywoman Julia Brownley (D-Santa Monica), a bill aimed at loan-servicing abuses such as failing to properly apply payments or post them in a timely manner. Nevertheless, they continue to oppose the bill, contending it is duplicative of federal regulatory efforts.

With the fate of the foreclosure bills uncertain at the legislative halftime, consumer groups and mortgage bankers say they're hoping for a positive outcome.

"We've still got some important legislative initiatives with strong protections for consumers," said Leonard of the Center for Responsible Lending. "But the mortgage lending industry is tightening its defenses and we haven't seen their full-court press yet."

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