As a slumping housing market threatens California's economy, state lawmakers gave a first, key approval to a bill aimed at preventing foreclosures of homes financed with sub-prime mortgages.
The measure by Senate President Pro Tem Don Perata (D-Oakland) mandates notifications to homeowners of interest rate hikes 120 days before the loan's monthly payment resets with a dramatically higher interest rate.
The bill, approved by the Senate Banking, Finance and Insurance Committee, also would require lenders and loan servicers to meet in person with a borrower in danger of defaulting on a loan.
The vote capped a first week of action in what is expected to be a contentious election-year session in an effort to show voters that lawmakers are responding to the mortgage meltdown. On the agenda are efforts to boost credit counseling and ban practices that helped lenders put many people into loans that they ultimately could not afford.
The legislative push supplements efforts by U.S. Treasury Secretary Henry M. Paulson Jr. and Gov. Arnold Schwarzenegger to encourage mortgage servicers to temporarily freeze interest rates on loans or to refinance loans at lower monthly payments.
Perata hopes to keep people in their homes by ensuring that lenders and borrowers communicate with each other months before a foreclosure becomes unavoidable. A mandatory face-to-face meeting, he said, would provide an opportunity to assess the borrower's financial situation, suggest possible alternatives to foreclosure and connect the borrower with independent credit counselors to help modify loan terms.
Perata said his proposal would "make sure that there is a procedure that allows both the lender and the person who has the loan . . . as much time as possible to work out something."
Much of the so-called foreclosure avoidance activity remains on the state level, where many mortgage bankers and brokers are subject to regulation.
The state Senate committee passed Perata's measure just before convening the latest in a series of informational hearings to gauge the effect of a worsening sub-prime loan meltdown that in the third quarter of last year contributed to the nation's highest mortgage delinquency rates in 21 years, according to the Mortgage Bankers Assn.
More than half a dozen proposals are moving or soon will be introduced in both houses.
On Monday, the Assembly Banking and Finance Committee endorsed a proposal by committee Chairman Ted Lieu (D-Torrance) that would require lenders to report to the state information on the results of voluntary programs to help homeowners facing foreclosure.
"I hope that the data shows that the lenders are aggressively modifying loans to keep homeowners in their homes," Lieu said. "But I fear that it may show otherwise."
Consumer advocates testified at the informational hearing that many mortgage servicers continue to be unresponsive to pleas for help in avoiding foreclosures. However, Gabe del Rio, a vice president of Community Housing Works in San Diego, singled out Calabasas-based Countrywide Financial Corp. for making a significant effort to reach out to borrowers who could be threatened with losing their homes.
"We're seeing results from them," he said.
Mortgage bankers and loan servicers, who are actively supporting voluntary state and federal programs to aid homeowners, remain opposed to the Perata and Lieu bills. They contend that the bills would put an expensive administrative burden on companies left short-staffed by layoffs prompted by financial losses from the sub-prime mortgage crisis.
The Assembly committee also approved two other, less contentious, sub-prime-related bills: a notification proposal similar to Perata's and a measure requiring mortgage credit counselors to post security bonds and register with the state Department of Justice.
Lieu said he expected strong opposition from mortgage bankers to a bill he planned to introduce next week that would put a stiff prohibition on some lending practices that he charges contributed to the ongoing foreclosure wave.
The bill would ban penalties for early payment of sub-prime loans as part of refinancing agreements. It also would prohibit loans with initial payments that are artificially low and don't cover accruing interest charges, require creditors to check that a borrower can afford a loan, and bar brokers from being paid incentives for steering borrowers into mortgages with higher rates than they might be eligible to obtain.
The Assembly and Senate bills "will be very helpful" in protecting borrowers in the future from the threat of foreclosure but might not be as useful in helping people who already have fallen dangerously behind on their home payments, Lieu said. "We can't break existing contracts, so we have to depend on voluntary actions by the lenders and persuading them to do the right thing."