A Sea Change in California on the Sub Prime Mortgage Crisis--Democrats and Governor Schwarzenegger Recognize the Problem and Pledge Action

You've identified absolutely nothing of import to deal with current borrowers in danger of foreclosure, and all contemporary reports state that everything the Assembly Dems offered deals with future mortgages. Do you have special information here?

DDay: Thanks for the question. I do have some more details and I'm working on another article--in fact many different ones.

First of all, the Speaker indicated yesterday that this is the much harder part to deal with--because what you have are signed contracts. There is only so much the state can do in that situation.

That being said, there are a number of items that will be in bills to be introduced (in days if there is a special session or if not in January when the legislature reconvenes if the Governor does not call a special session) which include:

Requiring a standardized workout process, some foreclosure process reform, and mortgage lender ombudsmen, and identifying even in these troubled times $10 million for credit counselors who are urgently needed so that those in trouble have someone they can talk to and trust (since many do not trust the lenders) and seek modification of loans. Having a third party help out is important as sometimes individuals won't talk to lenders.

Dave Jones, who chairs the Assembly Judiciary is looking at problems many have in getting into California's courts with mandatory arbitration clauses. There are some folks who have good fraud cases and that may help them--either with the leverage that a defendant facing a jury gives them or eventually giving them relief.

The counseling that folks need--even if they are bieng foreclosed on--is how to rent an apartment with impaired credit and the like.

Additionally, there has been some discussion of standards for lenders' responsiveness--as in many cases people and counselors cannot get through to lenders, or when they do, don't hear back for days or weeks--and the clock is ticking for them.

I have sources outside the legislature who have also advised me that there will be in the package parts that help those already snared in the current crisis.

Russo opines:

There are a number of signs that 2008 in California may be the "year of the subprime mortgage crisis", as this issue is at least the equal of health care, water, education, or the budget

This is hyperbole. Health care is obviously the most important of these because people die without it. The only problem with the budget is the 2/3rds vote--otherwise there would be cuts and revenue increases as in 1991 (and of course there was a 2/3rd vote then but the Republicans weren't as idealogical then). Water and education are important but can continue on auto-pilot, like most other things in this state, with the usual lamentable results.

One innovative solution to mortgage problems is to create a California "Fannie Mae", which would guarantee mortgages above the Fannie Mae limit ($430,000 or something like that). This would require floating a bond issue but would not require any expenditures, as they would issue underwriting guidelines, as the FHA does and sell the bonds on the open market. This would create a pool of liquidity, as one of the problems is that money is going to be tight for a while, which could trigger a recession. Someone is going to suffer here as California Real Estate became overpriced due to the sub-prime mortgages and lose underwriting standards.

Publius: Maybe--a bit of hyperbole--but because of the problems with the California economy and the budget this is causing as it ripples out, it may very well be related to whether something can be done about all these other issues. The "We don't have any money to do X, Y, and Z" crowd are already out there in force.

Maybe--also a bit of a spoof on "The year of..." themes.

Frank,
Who needs money to pay for it. California voters can just pass another bond to come due in 30 of 40 years? Let our kids worry about it. Lets bail everyone out who bought a house they could not afford. Come on we can do it!

Better yet why don't we take the tax dollars of from the prudent people still living in apartments. The families that felt homes were over priced and they could not affort one yet. The ones that saved hoping for a correction; the middle class living in an apartment. Yea, Yea lets take their tax dollars. I vote big government bail out!

It is my understanding that the banks can not own homes for an exteneded period of time (when taken in foreclosure). Does anyone know that time frame?

As one who lives near Stockton, I'm looking forward to the market dropping (I love it when things are on sale).

For those of us who have been financially responsible, this will be a great opportunity to pick up a few more homes.

Agreee! For those of us who have been financially responsible, this will be a great to to pick up a first house!

Pardon my not being so informed, but here's my question:

If left alone, wouldn't the following happen: IF the lenders and debtors don't prevent foreclosure (and lenders have a financial interest in helping prevent costly foreclosures), the houses will be sold in an excess-supply market, driving down home prices, and those who were previously priced out of the market will be able to re-enter.

Whereas, if more stringent requirements are enacted (which will probably reduce more good loans than bad loans), fewer loans will happen, resulting in less buyers re-entering, and therefore prices fall even more and more foreclosures occur

Why wouldn't this scenario happen?

Frank --

You may recall about 30 years ago when prepayment penalties were briefly disallowed, until federal regs reauthorized them. It seems to me that a federal disallowance of prepayment penalties, perhaps only on certain types of mortgages, would with stand scrutiny under the Contracts Clause. Plus it would promote refinancing. By contrast, ideas like forcibly extending "teaser rate" periods only postpone disasters and promote litigation. What do yo think?

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