Mortgage Legislation Passes CA Assembly - What's In It?

Yesterday, the Assembly passed SB 1137, which would alter the mortgage industry in California and aid those in danger of losing their homes. It got through the Assembly by one vote, with 10 Republicans voting with the Democrats. The Senate will need to pass it again to conform to some amendments and then this will go quickly to the Governor's desk. As Frank Russo writes:

The bill that passed, SB 1137 is authored by Democratic Senators Don Perata, Ellen Corbett, and Michael Machado, and coauthored by Speaker of the Assembly Karen Bass and principal coauthor Assemblymember Ted Lieu, who presented it on the Assembly floor. It goes beyond federal laws and received broad support from consumer groups. The legislation requires lenders and servicers to: 1) contact borrowers (or engage in a prescribed process to do so) to schedule telephone or in-person meetings on restructuring options before beginning the foreclosure process, 2) requires a 60-day notice to be given to tenants of buildings facing foreclosure before they can be removed from a rental housing unit; and 3) allows fines of up to $1,000 a day for owners of foreclosed properties that fail to adequately maintain them.

I like aspects of this legislation, particularly the steps toward removing blight in homes that aren't properly maintained, which is a big problem in heavily foreclosed areas. But this bill is a watered-down supplement to the raft of bills presented by Ted Lieu earlier this year, which would have really reformed the mortgage market. There would have been enhanced regulation, limits to penalties for prepayment, a requirement to translate loan terms to non-English speaking customers (yes, that's not current law), eliminate yield spread premiums (which rewarded lenders for getting their customers into higher interest-rate loans) and gotten rid of weasel language in mortgage documents like involuntary legal waivers. Almost all of those bills were gutted to the delight of the lending industry. What's in its place is vaguely helpful to borrowers, but not at all the industrywide reform that is needed to ensure that a runaway market like we saw a few years ago will never be repeated. Lieu modeled his reforms after those in North Carolina, where they work very well. This was a case of the lobbyists getting a hold of legislation before it could actually do any good.

Here's Ted Lieu's statement:

“Senator Don Perata’s SB 1137 sends a strong message that the California State Legislature will go further than federal law to address the mortgage foreclosure crisis. Recently and unfortunately, the Senate Banking, Finance and Insurance committee killed a comprehensive package of Assembly mortgage reform bills based on industry’s argument that California should do nothing other than conform to federal law. SB 1137 is a clear and stunning rejection of the ultra-conservative industry argument that California has no role other than to follow the federal government. This bill shows we will lead, not just follow, and that relying on the same federal regulators that failed us during the mortgage crisis is not an option.

“California was the hardest hit and therefore needs to be at the forefront of creating such a comprehensive plan. Such states as New York and North Carolina have already passed comprehensive mortgage reform. It is time we do more.

“Again, I would like to commend Pro Tem Perata on his recognition that sensible mortgage reform requires California to go further than federal law. SB 1137 is a solid first step, but we certainly need to do more to address adequately the mortgage crisis. The Assembly already passed a solid package of comprehensive reforms to the Senate. The ball is now in the California Senate’s court.”

Sen. Mike Machado was instrumental in getting industry's back and gutting the most far-reaching aspects of the Lieu bills, and Democrats in the Assembly gave some payback by killing most of the legislation he offered this year. Rather than an elementary school slap-fight, it'd be nice if there was some conviction from the leadership to go beyond the most cosmetic solutions and fight for their constituents.