A California legislator on Wednesday introduced a lending-regulation bill that seeks to mandate the obvious — that people who want to buy a home can actually afford the mortgage, property taxes and insurance.
The prevalence of exotic mortgages that put home buyers into loans they couldn’t afford to repay when interest rates jumped and home values plummeted has contributed to a wave of foreclosures across the country.
State Assemblyman Ted Lieu wants to make sure future home buyers do not find themselves in similar circumstances.
His bill would require mortgage lenders to ensure that borrowers can afford their basic monthly housing bills before qualifying them for a home loan.
He released the details of his bill Tuesday to The Associated Press, as the latest housing data showed foreclosures had reached a two-decade high in California in December. California has the greatest number of foreclosure filings nationwide and the fifth highest rate of home foreclosures.
The bill by Lieu, chairman of the Assembly Banking and Finance Committee, would ban certain designer mortgage loans and allow some homeowners to refinance their loans before higher interest rates kick in without paying fees or penalties. Some of his proposals are opposed by the industry representing mortgage brokers.
Lieu’s is the latest move by state lawmakers and Gov. Arnold Schwarzenegger to deal with a decline in the housing market that has touched off a wider economic slump and in turn is threatening state finances.
Their goal is to rein in a lending industry that over the past decade marketed non-traditional loans that often were front-loaded with low initial interest rates that later soared. In some cases, borrowers were paying only the interest on their loans, and in other cases even less than that.
When housing prices began sliding, they could not afford to refinance into more affordable mortgages.
Schwarzenegger last year signed a law requiring the more than 4,800 state-licensed financial institutions, mortgage brokers and real estate agents to follow more conservative federal lending guidelines.
In September, the Federal Reserve issued voluntary guidelines urging loan service companies to work with borrowers in danger of defaulting on their home mortgages. And the Bush administration in December announced a deal with the mortgage industry freezing the low introductory rates on subprime loans — those made to borrowers with shaky credit or low incomes — for five years.
Not every borrower who signed up for the risky mortgages was subprime, however. In California and Nevada, for example, thousands were investors looking to buy houses with little or no money down and flip them for a quick profit.
In California, mortgage defaults have been on the rise since fall 2005, coinciding with the start of a slowdown in sales and lagging home appreciation.
“The mortgage crisis no doubt shows what happens when you have inadequate regulations,” said Lieu, who was corporate vice president at financial services firm UBS before being elected to the Assembly in 2005.
Although more than half the country’s outstanding subprime mortgages were made by federally insured banks or their affiliates, the others were made by lenders subject to state regulation, according to the Federal Deposit Insurance Corporation.
Lawmakers have little power to change the mortgage contracts now in place but want to impose new rules protecting future borrowers against nontraditional loans that they say led to the mortgage meltdown.
“We are in this predicament because of the industry’s over-aggressive lending practices,” said Kevin Stein, associate director of the California Reinvestment Coalition, which represents more than 250 nonprofit organizations and state agencies. “We need to have reform in place to ensure that we don’t have these problems in the future.”
In California, state regulation could apply to an estimated 60 percent of home loans, Lieu said.
Among the loans that Lieu wants to ban are “stated-income loans” that require little or no documentation about how much money a borrower makes. Although many lenders are tightening qualifications themselves, Lieu said such self-policing falls short of government safeguards.
His bill also would allow homeowners to refinance subprime and high-cost loans without paying any prepayment fees and penalties. Borrowers could refinance nontraditional loans without paying penalties six months before the loan rate changes.
Brokers would be prohibited from earning incentives or kickbacks for steering borrowers into costlier, higher interest rate loans. The bill also would ban negative amortization loans — those in which homeowners don’t pay all of the interest on their loan and end up owing more on their house than is worth.
Pete Ogilvie, president of the California Association of Mortgage Brokers, said lawmakers are targeting legitimate loans that have helped thousands of Californians get into homes or refinance their mortgages at lower rates.
The fault lies with the scores of unlicensed lenders or those who gave loans to people who could never afford them, Ogilvie said.
“The approach to barring some of the terrible things that happened to people over the past several years is not to get rid of products that have existed and served the public well for 15 or 20 years,” Ogilvie said.
On the Net:
Assemblyman Ted Lieu:
California Reinvestment Coalition: http://www.calreinvest.org/
California Association of Mortgage Brokers:
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