State Lawmakers Work on Lending Reforms

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Lawmakers on Capitol Hill are tinkering with tools to stop the nation's economic engine from sputtering to a halt. Senators yesterday agreed on a package of tax breaks and housing bonds to help slow down a nationwide wave of foreclosures. KPCC's Julie Small says state lawmakers are doing some economic tinkering of their own. They're working on a number of lending reforms.

Julie Small: State lawmakers can't undo all the risky mortgages that are bleeding some Californians dry, but they can try to mop up some of the blood that's spilled. Senate leader Don Perata's introduced a bill aimed at the next wave of homeowners who face foreclosure when their subprime loans re-set to higher interest rates next year. Perata's measure would require lenders ready to foreclose to talk to homeowners first.

Don Perata: You can't foreclose on someone until you've notified them and had a conversation with them about how to restructure the loan, what options are available to you, what will happen if you go into default.

Small: Perata says it's the kind of handholding some homeowners need.

Perata: There have been too many people that just didn't know what happened to them. Got their homes foreclosed. Literally thrown out in the street.

Small: Ted Lieu, the Torrance Democrat who chairs the Assembly Committee on Banking and Finance, is trying to restrict penalties on homeowners who try to refinance adjustable mortgages.

Ted Lieu: We discovered that there were folks who could have refinanced into a fixed rate safer loan, but could not because of a massive pre-payment penalty. And as a result, when their interest rate spikes, they can't pay up the additional monthly payment, and then they get foreclosed upon.

Small: Lieu says California can restrict loans offered by any state-charted institution, like Countrywide Financial. Countrywide was the nation's largest seller of subprime loans, many with pre-payment penalties. Republican lawmakers say restricting the kind of mortgages lenders can offer in California could prevent people from getting home loans. Some Republicans in the Assembly are focusing instead on educating potential homeowners about debt. Chris Thornberg of L.A.-based Beacon Economics agrees the focus should be on teaching borrowers self-regulation.

Chris Thornberg: Should there have been someone telling these people, "No, I'm sorry. You can't take this mortgage and buy this house because you can't afford it?" Absolutely! However, that lack of regulation doesn't mean that the home buyer is innocent. You know (laughs), just because your mom's not there to tell you not to jump off the bridge doesn't mean it's OK to jump off the bridge.

Small: Thornberg says some homeowners drove up the housing market in California by rushing to buy overpriced real estate they couldn't afford. Now, he says, nothing can prevent prices from crashing back down.