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THE MORTGAGE MELTDOWN

State regulator calling for ban on stated-income loans

He says borrowers who overstated their means, and their lenders, have contributed to the sub-prime collapse.

March 27, 2007|Marc Lifsher | Times Staff Writer

SACRAMENTO — With as many as 460,000 California homeowners reportedly at risk of losing homes bought with sub-prime mortgages, a top California business regulator called Monday for a ban on certain risky and controversial lending practices.

At issue for Department of Corporations Commissioner Preston DuFauchard were home loans being issued without lenders fully verifying the prospective buyer's income and employment status. These so-called stated- income loans have contributed to the collapse of the sub-prime mortgage market, he said.

"It's a real fluid situation," said DuFauchard, who has asked Gov. Arnold Schwarzenegger whether the commissioner can require about 8,000 mortgage and commercial loan lenders in the state to fully verify a prospective buyer's income and employment status to ensure that he or she can afford a loan.

The testimony came at a hearing of the California Senate's Banking, Finance & Insurance Committee, which also heard the estimate of 460,000 possible foreclosures from consumer activist Paul Leonard, director of the Oakland-based Center for Responsible Lending.

Many borrowers, who qualified for adjustable-rate mortgages based on their unverified stated-income declarations, fell behind on their payments as the economy and housing market softened in the last year. As a result, Leonard said, they were hit with suddenly increased interest rates that put monthly payments out of reach of low-income homeowners.

Leonard said he would welcome stronger oversight of mortgage bankers' underwriting guidelines by the state.

The Department of Corporations, he said, has only 25 examiners on staff and "and clearly doesn't have the resources to stay on top" of the situation.

But DuFauchard said his staff had "examined all companies within the last four years."

A report released Monday by RealtyTrac, a consulting firm that monitors foreclosure activity, said that more than 16,000 Californians entered the foreclosure process in February, a 79% increase over the same period last year.

DuFauchard told state Senate Banking Committee Chairman Michael Machado (D-Linden) that he had concerns that the proposed rule to ban stated-income loans could be overturned if mortgage bankers filed a lawsuit contending that the commissioner lacked the authority to do so.

The governor's office confirmed that it was reviewing DuFauchard's request. Spokesman Aaron McLear stressed that "the governor is clearly concerned with the rise in Californians foreclosing on their home loans."

But Susan DeMars, executive director of the California Mortgage Bankers Assn., said she would like to see DuFauchard's evidence that a ban on some sub-prime lending practices was needed.

"I would think that there is a need for stated-income loans to be available for the appropriate borrower," she said.

The meltdown in the sub-prime market, which serves people with poor credit, has hit state lenders particularly hard. Nancy Wallace, a business professor at UC Berkeley, testified Monday that 25 of the 49 national sub-prime lenders are based in California.

Irvine-based New Century Financial Corp., the largest independent sub-prime lender last year, appeared to be moving closer to a bankruptcy filing Monday as its leading creditor, Morgan Stanley, said it planned to auction $2.48 billion in New Century mortgages. The loans had been collateral for a $2.5-billion line of credit that Morgan Stanley had provided.

Like many other sub-prime lenders, New Century had relied on Wall Street banks to provide credit so it could fund loans and also to buy the mortgages and bundle them into securities. Its agreements with loan buyers specified that if the mortgages went quickly into default -- an all too frequent occurrence last year -- the banks could require New Century to repurchase them.

When New Century was unable to buy back all the dud loans, the Wall Street firms first cut off its funding, forcing it to stop making new loans, and now have begun moving to liquidate the loans themselves.

"It's coming to a head," said an analyst at one of the Wall Street firms, who wasn't authorized to make public statements. "If they're going to file [for bankruptcy court protection], they're going to have to do it soon."

marc.lifsher@latimes.com

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Times staff writer E. Scott Reckard contributed to this report.

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