Fending off foreclosures

The focus of California policymakers for much of this year has swung from one crisis to another -- from prison reform to the state budget and, most recently, to healthcare reform and water. Yet the issue that arguably poses the greatest economic and social threat to California’s families -- widespread and accelerating foreclosures -- has barely registered on state lawmakers’ radar. Meanwhile, media coverage of families at risk of losing their homes has awakened the rest of the state to the real mortgage horrors some of our neighbors are facing. One family profiled in this newspaper saw its monthly mortgage payment grow by $800.

Gov. Arnold Schwarzenegger and the Legislature need to follow the lead of other states (such as Maine, North Carolina and Ohio) that have taken bold action to protect consumers and their economic well-being.

California families already have suffered historic levels of home loss, with foreclosures this year reaching their highest levels in 2 1/2 decades. Sub-prime lending has been reckless, and independent mortgage companies regulated by the state originated 60% of the loans. All many home buyers wanted was a fixed-rate loan, but they were placed in an unaffordable adjustable-rate mortgage with an interest rate that could only adjust upward.

The cost of foreclosures resulting from these risky loans is steep. Borrowers lose their homes and wreck their credit. As prices fall and neighborhoods are devastated, neighbors who continue to make their mortgage payments lose equity in their homes because of declining home values. And the downward cycle of housing prices means lower property tax revenues and fewer real estate and construction jobs. The governor has asked all state agencies to prepare for 10% spending cuts.

There are ways to prevent these losses, help borrowers in trouble and prevent a recurrence of this crisis, but the governor and legislators must put corrective remedies in place now.

One of the best ways to avoid foreclosure is for lenders to restructure or modify loans, such as converting adjustable-rate mortgages into fixed rates. Such modifications can keep homeowners in their homes, avoid greater housing price declines and require no public funds to bail out lenders or borrowers.

A recent survey found that only 1% of adjustable-rate mortgages were being modified, a statistic that underscores Federal Deposit Insurance Corp. Chairman Sheila Bair’s recent request of mortgage lenders to convert these loans to fixed-rate loans. The Federal Reserve and the editorial pages of the Wall Street Journal and the New York Times have embraced this approach.

Congress too has weighed in with the Mortgage Reform and Anti-Predatory Lending Act of 2007, which the House passed Thursday. While not perfect, it would address some of the abuses in the sub-prime market.

Schwarzenegger should follow the lead of the FDIC and the Federal Reserve to pressure lenders to modify loans. Just as important, he should require public monthly updates from lenders to ensure that they follow through on their promises. He should also request an emergency appropriation of $10 million to increase the number of nonprofit foreclosure prevention counselors and lawyers who help borrowers negotiate loan restructuring and provide legal advice when they fall prey to illegal predatory loans.

The Legislature should take a page out of Congress’ book and establish more responsible lending standards and practices for state-regulated mortgage lenders and brokers. Lawmakers should ensure that all loans are evaluated for the borrower’s ability to repay the loan and if it adjusts to a higher rate. They should prohibit predatory practices such as kickbacks paid by lenders to brokers to place borrowers in high-cost loans and eliminate the prepayment penalties that lock sub-prime borrowers into those loans.

Legislators should also demand that all parties in the mortgage process -- including brokers, lenders, Wall Street firms and investors -- bear some liability for the long-term performance and accountability of sub-prime loans.

As the epicenter of the foreclosure crisis, California should not be the state of caveat emptor. Now is the time for bold leadership and action to establish responsible lending standards for all borrowers who simply want to get and keep their piece of the American dream.