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Housing's good news

Sales rose in July; foreclosures slowed. In Sacramento, there's progress on a mortgage reform bill.

August 20, 2008

A glimmer of sunlight poked through the housing market gloom this week, when the latest statistics on sales, prices and defaults in Southern California were released. Home sales were nearly 14% higher last month than in July 2007, the first year-over-year increase in almost three years. And although foreclosures continued at more than twice the pace of last summer, the number in July was 8% lower than in June.

A revived housing market would be good for everyone, given how large a role it plays in the general economy. But even if last month's data are a hopeful harbinger, there's still plenty of bad news to come. Defaults in "liar loans" and "pick-a-payment" mortgages are just starting to ramp up, and the collapsing stock prices of Fannie Mae and Freddie Mac could lead to a costly government bailout. Based on the 1990s housing bust in California, Times blogger Peter Viles predicts that property values will continue to fall for several more years, even though the pace of sales may be starting to pick up.

Against this backdrop, leaders of the Legislature have reached a compromise with consumer and lending groups on a measure to guard against a repeat of the subprime meltdown that precipitated the current crisis. The bill -- a modified version of AB 1830 by Assemblyman Ted Lieu (D-Torrance) -- would bar pick-a-payment loans to subprime borrowers, limit the size and duration of prepayment penalties on subprime loans and prohibit brokers from steering subprime borrowers into costlier loans than they qualified for. Taking aim at the financial incentives behind predatory subprime lending, it would forbid lenders to pay brokers more when they persuaded people to take loans with prepayment penalties or higher interest rates. And it would require mortgage brokers to place their customers' financial interests ahead of their own -- a provision that would apply to prime and subprime borrowers alike. Finally, it would let California regulators enforce federal lending laws as well as state rules, while giving the victims of predatory lending more access to the courts.

The bill doesn't go far enough to satisfy some consumer groups, and it does have some unfortunate omissions. In particular, we wish legislators would crack down on mortgage "flipping," in which lenders refinance mortgages to generate fees for themselves but no benefits for the borrowers. We'd also like to see a requirement for simpler, clearer disclosures in borrowers' native languages. But the modified Lieu bill would still give Californians significantly more protection against the egregious lending practices that helped create the mess the housing market is in today.

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