Fixing the mortgage mess

The housing market’s boom and bust exposed stunning flaws in the housing finance system, from lax underwriting to sloppy record-keeping to incompetent loan servicing. California Atty. Gen. Kamala Harris is pushing lawmakers to incorporate some of the lessons learned into a new state law governing foreclosures, but lenders are resisting, arguing that the mortgage meltdown was just a “temporary” crisis that doesn’t justify a permanent change in law. That’s wishful thinking, and legislators should give troubled borrowers more protection against lenders’ procedural shortcuts.

The dispute focuses on Harris-backed bills related to the settlement that five major national banks reached in February with 49 state attorneys general and the federal government. In addition to providing more than $20 billion worth of relief for borrowers, the settlement requires the five banks to take more steps to avert foreclosures when it’s in their financial interests to do so.

The bills would extend similar procedural safeguards to all California mortgage holders, including banning a lender from moving ahead with foreclosure filings while a borrower is still being considered for a loan modification. They would also hold lenders more accountable for maintaining clear loan ownership records and other important documents involved in foreclosures.

A coalition of financial-industry and business trade groups have objected, arguing that while the settlement’s terms are temporary and apply to only five banks, the bills’ changes would be permanent and universal. But slipshod practices and record-keeping lapses that cause needless losses for borrowers and lenders won’t be any more acceptable after the settlement expires than they are now.

The coalition also objects to giving borrowers the right to sue to block foreclosures or recover losses when banks violate the law in more than just a trivial way. Although lenders need to be able to foreclose expeditiously on borrowers who can’t afford even a modified loan, they shouldn’t be able to run roughshod over borrowers’ rights in the process. The February settlement provides no remedies for individual borrowers whose lenders violate the new safeguards; Harris’ proposals would fill that gap.

After Republicans and some Democrats on the Assembly and Senate banking committees balked at the bills, Democratic leaders convened a conference committee last month to consider the measures. Members of that group should make sure that the bills wouldn’t encourage more defaults or enable borrowers to hold on to homes they can’t possibly afford. But they should also extend the protections in the national settlement to all California borrowers, permanently, with an effective means to enforce them.