California is facing its most devastating foreclosure crisis since the Great Depression, with no end in sight. We’ve experienced plummeting housing prices throughout the state and record foreclosures with each passing quarter. Legislative proposals that would help current borrowers in trouble and prevent a recurrence of the crisis are facing fierce opposition from well-financed lender and broker interests.
Data from the Mortgage Bankers Association released last week found that more than 40 percent of California’s subprime adjustable rate mortgages (ARMs) are either past-due or in the foreclosure process. The worst performers were the riskiest products: more than one in five subprime ARMs were in foreclosure at the end of the first quarter of 2008.
A solid package of mortgage bills was introduced in the California Assembly in January, including Assembly Member Ted Lieu’s subprime and non-traditional mortgage reform bill (AB 1830); Assembly Member Dave Jones’ assignee liability bill (AB 2359); Assembly Member Lois Wolk’s broker bill (AB 2880) and Assembly Member Julia Brownley’s mortgage servicer bill (AB 2740). These are not bail-outs, but rather set the rules, to prevent this kind of excessively risky lending from being repeated in the future. And Ted Lieu’s AB 69 would have required each lender to report data on their efforts to avoid foreclosures. Together, this package would provide common-sense protections to borrowers, stabilize the housing market and create access to responsible and sustainable homeownership credit.
A broad coalition of consumer and labor groups including Consumer’s Union, the Californian Reinvestment Coalition, AARP, ACORN, and the California Labor Federation have been working to see that strong reforms are enacted. Unfortunately, the well-financed and well-connected financial services industry would much prefer the status quo. They have uniformly opposed all but one of those Assembly bills (and that one, AB 2880 died in Assembly Appropriations.)
These crucial bills have suffered at the hands of industry lobbyists who in the past argued that stronger regulation would prevent borrowers from getting access to credit. Having fought off the most basic regulations, state-regulated lenders and brokers provided loans to borrowers with absolutely no ability to repay them, unless housing prices continued to rise. The result is clear: the industry’s steely opposition to adequate regulations in the past have led directly to the foreclosure crisis we are in today.
Today, the mortgage industry is resisting the meaningful changes proposed in the Assembly package. Their lobbying efforts have been largely successful in Sacramento: the subprime and non-traditional mortgage reform bill, while still strong, has been stripped of key borrower protections and more challenges remain. The assignee liability legislation—which would have made investors bear some degree of responsibility for their purchasing of shoddy loans—was gutted. The broker bill, designed to help rein in the “wild west” broker abuses so prevalent in the subprime market, failed to even make it out of the Appropriations committee. And the data reporting bill removed its lender specific feature, allowing all lenders to hide their individual shortcomings in aggregated industry data.
While the lending industry suggests that only a federal response is needed, 60 percent of subprime loans in 2006 were sold by state-regulated mortgage lenders. California can’t sit idly by hoping the federal regulators or lawmakers will save the day. The federal regulators have been asleep at the switch for the last few years and their recent actions have provided little meaningful relief for subprime borrowers. Nor have any federal legislative solutions been forthcoming; as Congress has shifted its focus to efforts to reducing foreclosure rather than new anti-predatory lending legislation.
Governor Schwarzenegger and California legislators must take matters into their own hands to provide a safe and responsible mortgage marketplace for California borrowers and lenders alike. This will require standing up to the industry’s continued lobby barrage.
Common-sense protections and standards for the mortgage market are needed to restore borrower and investor confidence in the mortgage market. Unfortunately, the mortgage industry continues to oppose just these kinds of changes embodied in the Assembly bills. Brokers, lenders and investors operating in a sorely under-regulated market got us into this foreclosure crisis. We cannot allow them to dictate the rules going forward.