The California Mortgage Crisis: Failing To Act Is Not An Option

By Pedro Morillas
Legislative Advocate
CALPIRG

While there is plenty of blame to go around when figuring out how the mortgage crisis happened, everyone agrees that it can never be allowed to happen again. Fortunately there are solutions being debated in the legislature that would reform some of the lending industry’s worst practices. AB 1830 and AB 2359 put the onus on mortgage brokers, stock brokers, borrowers, and lenders to reform their individual practices and restore a level of accountability to the mortgage lending industry.

Currently the deck is stacked against the borrower because there is no obligation for lenders and brokers to act in their clients’ best interests. In fact, the incentives go in the opposite direction. Lenders commonly offer kickbacks to brokers if they convince home-buyers to take out a much more expensive loan than what their credit history qualifies them for. Somewhere between 20 and 40 percent of those currently in a subprime loan today could have qualified for a better one. On the low end, this practice will be the reason for 100,000 of the loans that default over the next year. AB 1830 would ban the kickbacks, eliminating the incentive to fleece an unwary borrower.

AB 2359 will reform the practices taking place on the stock market, which is a more disconnected, but equally important part of the mortgage industry. Wall Street added fuel to the fire in the form of liquid capital to the banks making loans, which enabled the situation to get out of control so quickly. Assemblymember Jones’ bill will hold investors who have securities made up of home loans, accountable to the same rules that apply to the lenders and brokers. It is necessary to rein in the reckless way that loans are bought and sold on the stock market.

The housing market spiraled out of control with the end result that people got into loans they shouldn’t have, and are now paying the price because the market failed. Unfortunately, the borrowers, brokers, and lenders are not the only ones suffering from the aftermath of these unsound lending practices. Tens of thousands have lost their homes, hundreds of thousands more are in danger of the same fate, and the state is facing a $16 billion budget deficit. Clearly the time for strong reforms is now, and the California legislature has a great opportunity with AB 1830 and AB 2359.

Pedro Morillas joined CALPIRG’s advocacy team as its Sacramento-based Legislative Advocate in August 2007. Prior to that, for two years he directed citizen outreach offices for CALPIRG in Santa Cruz and San Diego, building citizen support for CALPIRG campaigns to improve drug safety, enact lobby reforms in Congress, and invest in public transit, among others.

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