Mortgage fix eluded lawmakers in 2001

The state of California had a chance to curb lending practices that would later contribute to a crisis in subprime mortgages when it set out in 2001 to regulate so-called "predatory" loans.

But lawmakers, many of whom took campaign contributions, trips to Hawaii and Rolling Stones concert tickets from subprime lenders, narrowed the legislation so much that consumer protections covered only a tiny percentage of mortgages, a review by The Bee found.

Saying they didn't want to dry up the market by being too restrictive, lawmakers produced a bill that let most lenders easily avoid making loans that triggered homebuyer safeguards.

One court decision further eroded the law's clout. In the face of industry opposition, lawmakers ignored warnings from consumer groups and killed a provision in a 2005 bill to reverse the court's interpretation and broaden the scope of the state law.

Major players in the subprime industry, meanwhile, contributed generously to governors, legislators, their causes and their entertainment.

They were led by Ameriquest, now out of the mortgage business, which contributed $9.6 million to political causes from 2001 to 2006, according to filings with California's secretary of state.

Ameriquest didn't limit its giving to campaign cash. It paid $72,000 for Assembly Democrats to attend a fundraiser in Hawaii during the Pro Bowl in 2005, including gifts, airfare, lodging at Hilton Hawaiian Village and meals – even $170 for cookies.

It handed out almost $90,000 worth of tickets to the 2005 Rolling Stones tour it sponsored, to both Democrats and Republicans. And it paid $95,000 to put up Democratic lawmakers at the Four Seasons Resort in Carlsbad so they could attend a golf tournament fundraiser held by Senate President Pro Tem Don Perata of Oakland.

Ameriquest didn't limit its largesse to Democrats, either. In recent years, some of its biggest contributions have been to Republican Gov. Arnold Schwarzenegger and his political causes.

When the 2001 law was passed, "Ameriquest had unique access, I remember that," said Kevin Stein, associate director of the California Reinvestment Coalition, which advocates equal access to banking and other financial services.

Whatever the reasons, the state missed the chance to head off a crisis that threatens to get even worse, said Norma Garcia, senior attorney at the West Coast regional office of Consumers Union, publisher of Consumer Reports magazine.

"What we see today is what we said was going to happen," Garcia said. "It is very distressing to know that a lot of what we proposed in 2001 could have had an impact."

Sen. Mike Machado, D-Linden, oversaw the 2001 legislation as chairman of the Senate Banking Committee. He said it was meant to address a different problem – sharp operators tricking elderly and other vulnerable people out of the savings they had tied up in their houses.

No one could have foreseen the dizzying variety of mortgage offerings that would crop up in ensuing years to entice borrowers with less than perfect credit, he said.

Feelings ran high on both sides, Machado said.

"Considering the very volatile climate we had at that time dealing with that legislation, compromises were made," he said. "Were the compromises good compromises? Some would say no. But I think we moved the ball."

The public record does not indicate that anyone in 2001 anticipated the scale of the crisis. But many of the provisions of the bills considered in that and ensuing years dealt with matters at the heart of the skid to come, such as making sure borrowers could afford their loans.

The subprime industry, meanwhile, assured lawmakers as recently as 2005 that the law was working as intended.

"Marginal or shoddy players who engaged in questionable practices have been driven from the market as professionally managed and efficiently run firms like New Century have flourished," Terry Theologides, executive vice president of New Century Financial Corp., told a legislative committee, according to a transcript. Theologides did not return a phone call seeking comment.

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• Call John Hill, Bee Capitol Bureau, (916) 326-5543.