Officials act to forestall foreclosures Worries grow in political arena

In Washington, Sacramento and the Inland Empire -- where 1 of every 43 residences has been subject to foreclosure -- officials Thursday offered money, legislation and ideas to help struggling homeowners stay in their homes and stop what critics charge are predatory lending practices.

Time is running out for finding a fix, said California Assembly Speaker Fabian Nunez (D-Los Angeles). “If you think we are in trouble now, just wait and see what happens,” he warned.

Nunez urged Gov. Arnold Schwarzenegger to call a special session of the Legislature to quickly deal with the expanding sub-prime mortgage crisis in California and joined Democratic lawmakers in proposing a package of new consumer protections.

In Washington, the focus was on national solutions. Treasury Secretary Henry M. Paulson Jr. met with banking regulators and lenders to find a way to keep interest rates affordable for at-risk homeowners.

And in the Inland Empire, Schwarzenegger kicked off a $1.2-million education campaign to help borrowers and lenders restructure loans before a home is lost to foreclosure. Over the next four to five years, hundreds of thousands of Californians’ mortgage payments are scheduled to jump by hundreds of dollars a month, he warned at a news conference in Riverside.

At the U.S. Treasury Department, Paulson stressed that he wanted to be more aggressive about avoiding foreclosures. “What the secretary has said is that we need a more systematic way to identify those borrowers and reach them faster,” said Treasury spokeswoman Jennifer Zuccarelli.

U.S. officials fear that the rising tide of foreclosures could accelerate the decline in home prices, leading to a vicious cycle of deeper losses for borrowers, lenders and investors.

“We think there’s progress being made toward finding a balanced approach that will help people stay in their homes without negatively affecting the markets,” said William Ruberry, spokesman for the Office of Thrift Supervision, which took part in the Treasury meeting.

Among the ideas that have been floated are encouraging lenders to extend low “teaser” rates on adjustable-rate mortgages to permit borrowers more time to refinance as well as quickly moving borrowers who are up to date on their adjustable-rate mortgages into fixed-rate loans before they go into default.

Indeed, those proposals are similar to provisions of an announcement Schwarzenegger made last week after conferring with four large California lenders, including Countrywide Financial Corp. On Thursday, he touted a plan to educate homeowners about services that could help them hold on to their property through refinancing or counseling.

“Our message is that lenders are willing to work with borrowers on finding a solution. But right now we are seeing homeowners who are afraid to even talk with lenders,” Schwarzenegger said. “In fact, loan officials have not been able to reach borrowers in more than half of all foreclosures. Some of these homes would have been saved, so seek out a solution before it is too late.”

The wave of foreclosures has hit California hard, Schwarzenegger said. According to RealtyTrac, a real estate information service, 1 out of 88 homes statewide is in foreclosure.

Nationally, five of the top 10 metropolitan areas for foreclosures are in California. Stockton ranks first, the Riverside-San Bernardino region third, Sacramento sixth, Bakersfield ninth and Oakland 10th.

In Sacramento, the Democrats’ still-tentative concepts would provide $10 million for independent credit counselors to help homeowners negotiate with lenders. They also would create a standardized process for lenders to restructure mortgages so homeowners can continue to make payments at current interest rates.

Lenders would also be required to keep regulators informed of how many loans they’ve restructured to keep people out of foreclosure.

Among the legislators’ anti-predatory-lending proposals is a ban on so-called yield-spread premiums, a type of bonus that lenders pay to mortgage brokers. Critics contend these rebates may encourage brokers to arrange high-interest or risky loans when buyers could have qualified for safer or lower-interest ones. Prepayment penalties, which make it expensive to refinance loans, would also be banned in some instances.

Speedy action by lawmakers and state regulators is essential to head off personal crises for California homeowners and a potential budget crisis for state and local governments, Nunez said.

Increased foreclosures and a weak housing market are expected to contribute to an estimated $10-billion deficit for next fiscal year’s state budget.

A spokeswoman said Schwarzenegger was reluctant to endorse Nunez’s call for a special session. Indeed, he has already ordered special sessions to pass bills to create a universal healthcare program and authorize water storage projects. Those efforts, so far, have yielded no legislation.

Schwarzenegger said he was prepared to sit down with the speaker and other legislative leaders to discuss proposals, said Deputy Press Secretary Sabrina Lockhart.

The consequences of doing nothing are likely to be significant. California lenders filed a record 72,571 notices of default on borrowers in the third quarter of this year, 18% more than the previous record set in 1996, according to DataQuick Information Services, which tracks real estate transactions.

Representatives of the mortgage industry in California said they recognized the seriousness of the foreclosure crisis but were guarded about the Assembly’s plan.

“No one wins in a foreclosure: Consumers lose their homes and lenders lose 20% to 40% of the loan value,” read a statement from the California Mortgage Bankers Assn.

“California’s lenders have stepped up with unprecedented efforts to communicate with borrowers prior to loan reset dates and help homeowners keep their homes through loan modifications, rate freezes, refinancings,” the group said.

The president of the California Assn. of Mortgage Brokers, Peter Ogilvie, urged lawmakers and the governor to seek a balance between “consumer protection and preserving access to the American dream of homeownership” by making it too difficult for prospective buyers to get credit.

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marc.lifsher@latimes.com

maura.reynolds@latimes.com

Lifsher reported from Sacramento and Reynolds from Washington.