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Foreclosure fixes

Lawmakers should stop trying to micromanage the mortgage mess. There's no one-size-fits-all solution.

January 25, 2008

The sub-prime mortgage crisis is like a freak hurricane that gathers strength after it hits land. Foreclosures set a record in California during the last three months of 2007, yet analysts expect even more this year as a growing number of sub-prime borrowers face significantly higher monthly payments. And as the foreclosure toll mounts, the glut of vacant houses could depress property values in neighborhoods across the country, making it harder for millions of other borrowers to sell or refinance their homes.

In the face of these accelerating trends, California lawmakers are advancing two bills -- SB 926 by Senate President Pro Tem Don Perata (D-Oakland) and AB 529 by Assemblyman Alberto Torrico (D-Newark) -- to require a specific series of actions by lenders before they can foreclose on a mortgage. Months before an adjustable-rate loan resets to a new interest rate, the lender (or the company that services the loan) would have to send the borrower an estimate of the new, higher monthly payment. And before putting delinquent mortgages into default, lenders would be required to hold face-to-face meetings with borrowers to discuss ways to avoid foreclosure.

Although the concern about foreclosures is well placed, lawmakers shouldn't be micromanaging how lenders protect their interests. Instead, they should focus on helping borrowers and lenders cut through the complexities of the mortgage business to strike deals that work for both sides. After all, foreclosing on a house in a declining real estate market is costly for lenders too. They have a strong incentive to find efficient ways to keep mortgage payments coming. Of course, many sub-prime borrowers can't afford the homes they bought even at their current rates. But that's a longer-term problem that requires better disclosure for buyers, more protection against misleading sales tactics by mortgage brokers and tougher rules against predatory lending.

In the meantime, mortgage lenders and servicing companies should show Sacramento that they're doing all they can to avert foreclosures. Lenders have launched counseling programs for borrowers and started modifying more loans, yet these moves haven't kept pace with the growth in foreclosures. AB 69 by Assemblyman Ted Lieu (D-Torrance) would require monthly reports on mortgage defaults and modifications, which would provide a good measure of the industry's efforts to turn the tide. Lawmakers should start there, rather than trying to force the mortgage industry into a one-size-fits-all response to a complex problem.

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