California governments really shouldn't be meddling in the mortgage business.
Not that they won't try. Gov. Jerry Brown on Wednesday signed Assembly Bill 278 and Senate Bill 900, the Homeowner Bill of Rights. The new law is unlikely to deliver the relief to homeowners battling foreclosure that its sponsors promise, and more than likely to make getting a mortgage in California even tougher.
But no matter. The state law is relatively benign compared to a plan by some city governments to use their eminent domain powers to stop private investors from legally foreclosing on homes.
"The tragedy of the mortgage meltdown has caused suffering for millions of people," Brown said in Los Angeles, where he appeared with Attorney General Kamala Harris and a bevy of activists to tout the foreclosure reform law. The governor promises the law will end lender "abuses" and aid consumers.
Adding some transparency to a complicated and confusing legal process certainly can't hurt. Truth is, the Homeowner Bill of Rights will do a few good things, along with some bad things, and one very bad thing in particular.
The good: Banning bank employees from signing affidavits and other foreclosure documents without proper verification a scandalous practice known as "robo-signing."
The law also requires that banks give specific reasons for denying a loan modification. Banks must also provide borrowers a single point of contact to help them navigate the labyrinthine loan mod or foreclosure process. No quarrel there.
The bad: Ending the practice of "dual tracking," in which lenders initiate foreclosure proceedings while considering a borrower's loan mod application. Dual tracking is reviled because, the law's advocates say, banks can sell foreclosed houses out from under poor borrowers struggling in good faith to save their homes.
But imposing bureaucratic delays on the foreclosure process often just delaying the inevitable raises costs and heightens uncertainty. Those costs will be passed on to qualified buyers while potentially pricing out first-time borrowers.
The very bad: Empowering consumers (read: trial lawyers) to sue lenders for "material violations" of the law without clearly specifying what the heck that means. The law also allows for lawyers to seek sizable civil penalties for supposedly "reckless" or "willful" violations. It's an open invitation for abusive and frivolous lawsuits which also raises costs.
What are the odds that obtaining a mortgage in the Golden State will get any easier once the Homeowner Bill of Rights takes effect in January? Skittish lenders would be less likely to approve certain loans and will certainly raise the price of their services knowing they face costly hurdles if borrowers default.
So the state law is likely to be disappointing, at best. But a plan by the Southern California cities of Fontana and Ontario to use eminent domain to seize underwater mortgages and sell them to a private equity firm is practically guaranteed to backfire.
About half of all the homes in San Bernardino County are underwater I know, I live in one of them. Of those, about half are in some form of default, and a fraction are in foreclosure.
The eminent domain plan under discussion would allow those two cities to take underwater mortgages where the homeowners' payments aren't necessarily in default; write a check to the note holders for 80 percent of what the property is really worth; and sell the mortgages to a different group of investors, who would stand to make a tidy profit with newly restructured loans.
Does anyone see the problem here? Eminent domain may be an ancient institution, but modern governments have found clever ways to pervert "public use" into private enrichment.
Apart from the obvious potential for corruption San Bernardino County is a hotbed of it the eminent domain scheme is a classic case of governments robbing Peter to pay Paul.
Sure, some people would get to stay in their homes. Some private investors would lose big. But one or two favored private equity firms would make out like bandits.
Fitch Ratings, the global credit rating firm, warned this week that these eminent domain schemes could kneecap private residential mortgage-backed securities. That matters because property values, which are already in the tank in Southern California's Inland Empire and elsewhere, could go even lower as investors dump their worthless securities.
And, oh yes, borrowing costs would rise even higher still.
Four years into a housing crisis, government has floundered to find solutions. They're looking in all the wrong places. Extending its reach into the mortgage business and abusing eminent domain are poor remedies that skew an already distorted market. Something's got to give. Unfortunately, potential homeowners and taxpayers will bear the brunt of this folly.