Major Subprime Lending Reform for California Passed by State Assembly

“The subprime lending spree convinced many participants, including, underwriters, credit rating agencies, and lenders to look the other way when it was obvious that the millions of loans were made without adequate analysis. AB 1830 is the solution we need to prevent the next mortgage collapse. The fact that this issue has managed to shake the global economy makes it clear that, regardless of who is to blame, this can never be allowed to happen again.

“AB 1830 is a start at doing just that. This bill would require that a borrower must be able to repay the loan over the entire life of the loan, including those payments for taxes and insurance. Additionally, it would ban incentive compensation that entices originators to push borrowers into costlier loans than they could afford, as well as excessive prepayment penalties that trap borrowers into costly loans when they could otherwise refinance. AB 1830 would also restrict stated income loans that are based entirely on a borrower's verbal representation of their income and would prohibit loans that could lead to negative amortization, where the borrower owes more on the loan than the amount first borrowed.

“California must take a leadership role in this issue, because mortgage reform in congress has fallen off the radar screen.”

During the debate, the handful of Republican Assemblymembers who spoke against the bill talked about individual responsibility of those in the loan process—buyers and lenders—and one Republican spoke of individuals who had made “poor choices.”

Republican Bonnie Garcia was an exception. She talked about the stack of papers one signs when buying a house and the difficulty for even highly educated buyers to understand the terms of the agreements. She said, “It would be nice if lenders sat down and explained to borrowers what is in these loans, but the fact of the matter is, they don’t.” She also rebutted the frame other Republican members were putting on the issue that this is a matter simply between the buyer and seller, noting, “When the guy who lives next door to you loses his house, the value in your property goes down 20%.”

In his close, Lieu took pains to point out that this bill was not a bailout—despite the massive federal government bailout of the investment banking firm, Bear Stearns. He described AB 1830 as “on a going forward basis,” focusing on “what can we do to prevent this from happening again.” He then directly challenged the assumptions made by opponents of the bill, saying: “Everyone agrees there was a market failure. The market failed in being efficient—that’s when the government steps in. …This bill is very targeted just at sub-prime loans—at the greatest area of market failure—and it stops those areas of risky practices and products that encourage these kinds of crises.” He reminded his fellow legislators of studies that show that over 50% of those led into these types of financing qualified for fixed rates and often better rates.

After the vote, Lieu said: “Predatory lending and the unregulated excesses of the mortgage frenzy the last few years have resulted in shattered dreams and severely damaged the state and national economy. With this bill, we’re saying never again will a crisis of this magnitude happen in California. While we can’t change mortgage contracts that are already signed, we’re going to make sure we never go down this path again.

“Today, we are seeing the catastrophic result of a loosely regulated market that allowed an unbridled lending spree to take place without proper oversight,” stated Lieu. “Investors and lenders, now more than ever, need peace of mind in knowing that for future home mortgages, the loans were offered to a borrower who could actually afford to pay back the loan and won’t default. This is the ultimate market confidence measure.”

Protecting Tenants Caught in the Subprime Mess Through No Fault of Their Own

The Assembly also approved AB 2586 by Assembly Majority Leader Alberto Torrico to provide greater protections for tenants facing eviction as a result of foreclosure and to double the amount of time renters have to find new housing. The bill passed on a straight 43 to 26 vote with Democrats in support and Republicans opposed.

According to the California Apartment Association one-fourth of all foreclosed single-family homes are occupied by renters. Torrico argued that through no fault of their own, these renters find themselves scrambling to locate another home for their families, often with little awareness of their rights and little time. An article by Los Angeles Times reporter David Lazarus, Shadow Victims of the Mortgage Crisis: Renters," earlier this year pointed out many of the effects of the record foreclosures on tenants.

Torrico said “Renters see their lives thrown upside down without any hint that the property owner cannot meet the mortgage. These thousands of families are really the hidden casualties of the mortgage meltdown. They did not fall behind their payments. They didn’t offer someone a loan they knew couldn’t be paid. Yet, they are paying the price of the credit crisis and are evicted, often with little or no notification and no information to guide them.”

AB 2586, would double the amount of time long-term tenants have to move from 30 days to 60 days and would also provide enhanced notification requirements.

Torrico noted that currently, notice of foreclosures are often posted on the property and directed at the owner. Seeing the posted notice is frequently the first time tenants are aware the home is foreclosed. On other occasions, tenants were unaware their homes were being foreclosed until the utilities were shut off.

Under AB 2586, each tenant in a property with one to four units would be notified individually of a possible foreclosure sale. Public utilities or any corporation that furnishes electricity, gas, heat, or water, would be required to provide written notification to renters at least 15 days prior to termination. Renters who make utility payments would be able to deduct the amount of the payment from the rent due. It also contains provisions relating to the return of security deposits and prohibitions against changing locks, cutting off utilities, or blocking access to premises.

AB 2586 is sponsored by the Western Center on Law and Poverty. It is supported by a number of organizations including the Gray Panthers, California Foundation for Independent Living Center and the Asian Americans for Civil Rights and Equality.

Helping Homeowners Through a Mortgage Guarantee Program

The Assembly passed a third bill, by Democrat Cathleen Galgiani, to allow the California Housing Financing Authority to establish a mortgage guarantee program to assist homeowners who may be at risk of losing their home due to the structure of their current mortgage agreement. This authority is the state's affordable housing lender making low-interest loans through the sale of tax-exempt revenue bonds. It does not receive any direct general fund dollars and is funded through tax exempt revenue bonds. The residence securing the loan must be the primary residence of the borrower in order to be eligible.

AB 2509 was passed by a 45-26 vote, with all "no" votes from Republicans. Six Republicans also abstained, despite being in the Assembly chamber.

The lack of Republican support drew a barbed comment from former State Senator Art Torres, Chair of the California Democratic Party, who said: "President Bush bailed out the billionaires at Bear Stearns, but Assembly Republicans won't lift a finger to help out the hundreds of thousands of homeowners facing foreclosure on their homes. The Republicans’ votes are a slap in the face to Californians who are struggling in the Bush economy and may lose the roof over their heads.”

The Republicans who voted against the bill included many whose districts encompass areas with the highest home foreclosure rates in the nation, including Stockton, Modesto, and Riverside/San Bernardino.

These measures head over to the Senate which has already passed legislation by Senate President pro Tem Don Perata with some of these provisions.