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Give us shelter

Sacramento must give Californians the means to fight predatory lending practices.

August 11, 2008

You have to say this for the mortgage-lending meltdown: It's impressive how relentless the bad news has been. Even as other parts of the financial industry show signs of bottoming out -- for example, Thursday's agreements by Citigroup and Merrill Lynch & Co. to buy back $17 billion in "auction rate" securities that couldn't be resold -- the reports from the housing market just keep getting bleaker. Foreclosures in California last month reached a new high, with $12.5 billion worth of loans repossessed -- 20% higher than the previous record, set in May. A new analysis by the Wall Street Journal found that mortgage loans made to borrowers with good credit in 2007 are going bad at a much higher rate than the ones made in 2006. And Fannie Mae and Freddie Mac both announced bigger quarterly losses than expected, raising more fears of a taxpayer bailout of epic proportions.

Despite the gloomy circumstances, lawmakers in Sacramento have stubbornly resisted calls to protect state residents against the predatory lending practices that helped create the crisis. While other states have adopted tough limits on the terms of subprime loans and on the incentives lenders give to mortgage brokers, California has dithered over an Assembly-passed bill, AB 1830, that would keep subprime borrowers from being trapped in punitive loans. New truth-in-lending rules issued by the Federal Reserve addressed some elements of the subprime problem -- for example, by limiting prepayment penalties and requiring lenders to assess borrowers' ability to repay adjustable-rate loans after the introductory discount expires. But it took no action on "yield spread premiums," the financial rewards that lenders offer to brokers who push subprime borrowers into loans with higher interest rates.

Negotiators for Gov. Arnold Schwarzenegger, state legislative leaders and industry groups have been trading proposals based on AB 1830, to no avail. They should not let this year's session end without a measure regulating subprime yield spread premiums, which encourage brokers to sell loans with smaller up-front payments but larger long-term costs. The bill should also restrict "pick-a-payment" loans that encourage borrowers to sink deeper into debt, bar loan refinancings that don't benefit borrowers and give state courts more leeway to enforce federal lending rules. There's no point in waiting to steel the state's defenses against another housing crisis, because the end of the current one is nowhere in sight.

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