California Lawmakers Address Subprime Mortgage Crisis

Democrats propose legislation that would help homeowners facing foreclosure and crack down on predatory lenders.

SACRAMENTO, CALIFORNIA - Democrats in the state Assembly today weighed in on the burgeoning subprime mortgage crisis, announcing proposed legislation that would help struggling homeowners avoid foreclosures and prevent future victims by toughening enforcement against predatory lending practices.

The handful of proposals, which probably will be introduced as bills when the Legislature reconvenes in January, would create a standardized process for lenders to restructure mortgages so homeowners can continue to make payments and not be hit with higher interest costs.

The package also would mandate that mortgage lenders send information to regulators about how they’ve restructured loans to keep people out of foreclosure.

Among the legislators’ anti-predatory-lending proposals is a ban on so-called yield-spread premiums, in which mortgage brokers arrange high-interest loans when buyers could have qualified for lower-interest ones.

Speedy action by lawmakers and state regulators is essential to head off personal crises for California homeowners and a potential budgetary crisis for state and local governments, said Assembly Speaker Fabian Nuñez (D-Los Angeles). Increased foreclosures and a weak housing market are expected to contribute to an estimated $10-billion deficit for next fiscal year’s state budget.

“We will work with the governor to do what we can to put out this fire and do what we can to prevent the fire next time,” Nuñez said in a statement issued before a Capitol news conference.

The consequences of doing nothing are significant. California lenders filed a record 72,571 “notices of default” on borrowers in the third quarter of this year, a figure 18% higher than the previous record set in 1996, according to DataQuick Information Services, which tracks real estate transactions.

What’s more, the Congressional Joint Economic Committee estimated in October that an additional 200,000 homes in California would go into foreclosure through the end of 2008.

The prospect of widespread foreclosures prompted Governor Arnold Schwarzenegger last week to announce an agreement with four major lenders to expand a practice of allowing people at risk of defaulting under higher interest rates to continue paying low introductory rates.

This morning, the governor highlighted that new program at a meeting with local elected officials and housing activists in Riverside. Schwarzenegger announced he was earmarking $1.2 million for a statewide public awareness campaign to educate homeowners about services that could help them hold on to their property through refinancing and counseling.

He said such help is especially needed in Riverside and San Bernardino counties, where one in 43 households has received a foreclosure notice.

“Our message is that lenders are willing to work with borrowers on finding a solution. But right now we are seeing homeowners who are afraid to even talk with lenders,” Schwarzenegger said. “In fact, loan officials have not been able to reach borrowers in more than half of all foreclosures. Some of these homes would have been saved, so seek out a solution before it is too late.”

In Washington, Treasury Secretary Henry Paulson convened a meeting of mortgage lenders and banking regulators to discuss more aggressive ways to head off mortgage foreclosures.

“What the secretary has said is that we we need is a more systematic way to identify those borrowers and reach them faster,” said Treasury spokeswoman Jennifer Zuccarelli.

Among ideas under discussion are automatically extending low “teaser” rates on adjustable-rate mortgages past the introductory period to permit borrowers more time to refinance into conventional mortgages. Banking officials are also trying to figure out how to permit the refinancing of mortgages that were bundled into securities and sold to third-party investors. Many of those securities put narrow limits on efforts to refinance the mortgages.

State lawmakers wade into sub-prime crisis
By Marc Lifsher | Los Angeles Times