By John Hill - pjhill@sacbee.comp

Published 12:00 am PST Sunday, January 13, 2008
Story appeared in MAIN NEWS section, Page A3

California lawmakers are writing a bevy of bills to deal with the crisis in subprime mortgages – everything from requiring mortgage companies to meet face to face with homeowners in default to closer monitoring of the industry's practices.

The bills fit into two categories – those intended to help borrowers currently on the ropes, and those meant to reform the industry to avoid a relapse.

One question about the burgeoning effort is whether and how much the Legislature can turn back a crisis that most experts think is gaining steam.

Another is whether the mortgage industry, which traditionally used its considerable clout in the Capitol to shoot down legislation it didn't like, will enjoy the same status in light of the meltdown.

The California Mortgage Bankers Association opposes three of the bills, which will go before legislative committees as early as this week.

"These bills haven't been vetted," Dustin Hobbs, the association's spokesman, said. "There are tons of problems with them that are really going to hurt consumers."

Homeowner advocates, however, say that this session may offer the best chance to get the Legislature to pass protections they have been pushing for years.

"This is the time we really need to look at it and develop some common-sense reforms," said Kevin Stein, associate director of the California Reinvestment Coalition, which advocates for low-income communities' access to banking services.

One of the bills Stein and other advocates consider crucial is Assembly Bill 69 by Ted Lieu, D-Torrance.

AB 69 would require lenders and related businesses regulated by the state to make monthly reports on the types of loans they are servicing or making, including whether they are past due, in foreclosure, or modified to avoid a default. The information would be posted on the Web sites of the state departments that regulate lenders and brokers.

Advocates say the bill is needed because, while lenders say they want to avoid foreclosures and work out deals that allow people to stay in their houses, hard data are lacking on actual outcomes.

"They're all saying, 'We don't foreclose on anybody.' Meanwhile, it happens all the time," Stein said.

By contrast, advocates say, when it comes to loan originations, companies make public a wealth of data. That information has discouraged the industry from practices such as ruling out loans in minority neighborhoods.

The mortgage brokers association opposes the bill. Hobbs said it would duplicate efforts already under way, and impose an unfair burden on lenders regulated by the state, saddling them with requirements not put on federally chartered lenders.

"It creates an unfair competitive disadvantage," he said.

Senate Bill 926 by Senate President Pro Tem Don Perata and others would require mortgage servicers to have face-to-face meetings with borrowers in default to review their situations and discuss their options.

SB 926 would also require lenders to send notices to borrowers three times to warn them that their mortgage interest rates were about to go up and give them estimates of their new payments. The subprime meltdown has been fueled, in part, by mortgages with low "teaser" rates that escalate dramatically later.

The bill would require notice four months, three months and 45 days before the change hit.

The requirement for a face-to-face meeting is "entirely reasonable" since lenders demand the same before making a loan in the first place, said Paul Leonard, director of the California office of the Center for Responsible Lending, a research and policy nonprofit group.

The association opposes SB 926 as impractical and vague.

If mortgage servicers can't even reach people by phone, Hobbs asked, what are the chances of setting up a meeting? The companies generally have only a couple of offices nationwide that handle mortgage workouts, he said, making the logistics difficult.

Sending three notices makes no sense, Hobbs said, because the new mortgage payments are based on fluctuating interest rates and so cannot be nailed down until the last minute.

"It's just going to further confuse homeowners," he said.

Hobbs said another requirement that the notices be written in the same language used to make the original mortgage is unworkable. The companies that service the loans often did not make the loan, and so have no way of knowing, he said.

SB 926 also requires the notices to be written at a sixth-grade reading level.

"Talk about vague," Hobbs said. "What does that mean?"

A number of bills address other aspects of the crisis. Lawmakers say they plan to take more time to write laws to further regulate the industry, since those changes are less pressing than immediate relief for homeowners in default.

But they shouldn't wait too long, Stein said. While the kinds of loans that plunged the industry into crisis aren't being made now, he said, "there are always outliers who will do what they will do. I think we need the protections."

Hobbs, though, says the industry can largely police itself.

"In a lot of cases, the market is working out its own problems," he said.

One thing is certain: Some of the players that have lobbied hard on lending bills in the past won't be there this time around – they're either out of the subprime business, or bankrupt.