California Lawmakers Reject Mortgage Reforms

California lawmakers have decided to go back to the drawing board on reforms to the mortgage lending process. A series of bills had previously passed the state Assembly but members of the Senate Banking, Finance and Insurance committee decided that there were too many questions for them to pass the package.

The legislators and even some members of the banking and mortgage industry conceded that reforms are needed but it was felt that this package might do more harm than good. Some senators suggested waiting until the federal reforms are put through this summer. While it might seem like an abdication of responsibility, there is some logic in this position as the federal rules usually trump state rules and so it would make sense to know what you are working with.

Certainly some reforms are needed as California is the epicenter of the mortgage meltdown with several areas having of the highest forclosure rates in the nation. The reforms, backed by state Assembylman Ted Lieu would have made several major changes to the way mortgages are made and serviced. Among the proposals were

•  It would have required lenders to make sure the borrowers could not only afford the loan but also any associated taxes, insurance, etc. In order to do this it also would have pretty much banned the current practice of offering loans with little or no documentation
• Another part of the proposal would have banned negative amortization loans which cause the loan balances to rise even while the lenders are making payments
• A third bill would have banned mortgage companies from adding attorney fees, late fees, early payoff fees and the like to the total bill owed by the lender
• Other proposals included restrictions on the amount of interest that could be charged and how quickly the rates could be increased

In the end committee chairman Mike Machado proposed waiting to see what the federal rules are and to take the intervening time to work on new more effective proposals.

Reaction to the voting was mixed, with some consumer groups expressing disappointment that the proposals did not pass while others were pleased because they felt the bills did not go far enough.

I think most of us would agree that there are many problems in the current lending process (the most notable being to give loans to people who cannot afford them in the name of ‘fairness’) but I think we need to be careful. Too often these days we shift from one extreme to another in terms of legislation and we need to make sure this does not happen again.