Gov. Arnold Schwarzenegger wants all legislative business to halt until legislators pass a budget. But the real world doesn't come to a standstill. Urgent issues need to be addressed, and big on the list is the housing mortgage crisis. Californians need to get something out of this Legislature on this topic before Aug. 31.
The state, still reeling from the wave of subprime fore- closures, has done little to prepare for the next wave.
Aheadline in Business Week says it all: "The Next Real Estate Crisis: By April 2009, hundreds of thousands of option ARM mortgages will begin resetting, bringing on a fresh wave of foreclosures."
The article explains: "Among the states expected to be worst-hit is already- battered California. About 60 percent of the outstanding option ARM loans in the U.S. were sold to California homeowners, according to Credit Suisse."
Schwarzenegger and the leadership in the Senate and Assembly can't just sit on their hands while they wait for a budget solution.
The Federal Reserve's new Regulation Z clearly helps, but it has some omissions that California will have to address. It also starts too late (October 2009).
Any California legislation should take effect no later than January and should include:
• Collection of specific lender data on loan modifications. Schwarzenegger's voluntary loan modification has had some effect, but the number of such modifications remains dwarfed by notices of default and foreclosure sales. California needs tracking of individual lenders and servicers (not just aggregate information) and public reporting of results to direct some sunshine on who's doingwhat and put pressure on for more modifications.
• Banning prepayment penalties outright. These penalties for paying off a loan early hinder refinancing, trapping borrowers in loans they cannot afford.
• For all home loans, banning the steering, counseling or directing of consumers to a loan that is more expensive than one for which they would otherwise qualify based on their income and creditworthiness. California already does this for some loans (see AB 489, passed in 2001).
• Banning broker commissions called "yield spread premiums," fees paid by a lender to a broker for higher-rate loans. As Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., has said, these fees create a financial incentive for brokers to steer borrowers to higher-cost loans.
A study by the Federal Reserve showed clearly that simple disclosure does not solve the problem. As the Fed said, disclosures end up confusing consumers, who believe, falsely, that mortgage brokers have a duty to find them the lowest interest rate and best terms available.
The Fed postponed action; California should not.
Schwarzenegger should demand that lawmakers send him a strong bill with these elements. Assembly Speaker Karen Bass and Senate President Pro Tem Perata need to crack heads to get a package done soon.
FOR MORE INFORMATION
See the Center for Responsible Lending Aug. 4 presentation before the Assembly Banking and Finance Committee: "The Mortgage Crisis Today: How Far Have We Come and Where Do We Need to Go?"
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