The first bill from Sacramento to provide relief to homeowners at risk of foreclosure became law Tuesday. At a ceremony in Oakland, Governor Schwarzenegger signed a measure that requires lenders to speak directly to subprime borrowers before foreclosing on them. It gives renters a couple months to save the mortgage, and prevents foreclosed homes from turning into neighborhood blight. But KPCC's Julie Small reports consumer advocates want California's lawmakers to do a lot more.
Julie Small: Homeowners who took out subprime mortgages have trouble paying them when they re-set at much higher rates. Oakland Democrat Senator Don Perata says a lot of California homeowners suddenly facing much higher mortgage payments describe the same frustration.
Don Perata: They say, "We could never talk to anybody. The first time we knew we were in trouble, we got it in the mail saying we were being foreclosed upon."
Small: Perata's bill requires lenders to contact borrowers by phone at least 30 days before foreclosing. He says a phone call might let homeowners work with lenders to modify loans.
Perata: This requires a conversation between the two parties of interest, and hopefully they can work something out.
Small: Governor Arnold Schwarzenegger praised Perata's bill as an important tool for consumers.
Governor Arnold Schwarzenegger: Half a million Californians have subprime loans that will jump to higher rates over the next two years, and those people need help.
Small: Consumer advocates welcome that help, but they're hoping for a lot more of it. Norma Garcia with Consumers Union, the non-profit that publishes "Consumer Reports" magazine, says California should ban incentives for lenders to act against the interests of the borrower.
Norma Garcia: Prepayment penalties that keep people locked into their loans. Broker incentives to put people into higher cost loans than they actually deserve, known as "yield spread premiums."
Small: Legislation by Assemblyman Ted Lieu of Torrance would curtail those practices, but last week, the Senate Banking Committee gutted the bill. Norma Garcia doesn't buy the reasons the Senators gave: that the federal government will issue new regulations for subprime lenders this month. Garcia says California doesn't have to defer to the feds.
Garcia: California has jurisdiction over about 60% of the subprime lending industry because they're licensed by our state. Sixty percent of the subprime lending industry! Think about that, what that means in terms of the impact that this state government can have on shaping the mortgage lending practices that affect the public.
Small: Consumer Union's Norma Garcia says the federal government has reacted slowly to the subprime crisis. Senator Don Perata put it more bluntly than that.
Perata: The Bush administration treats us like we didn't exist. Like the West Coast starts in Nevada.
Small: Perata says he's trying to salvage parts of Assemblyman Lieu's bill to police lenders better, but whatever bill makes it out of committee will need the governor's support if it's going to become law. He prefers market solutions, rather than government intervention.
Last year, the governor brokered deals with some lenders to voluntarily modify loans, at lower interest rates so consumers can hang on to their homes. Consumer advocates worry that pleasing the governor will mean lawmakers will water down mortgage relief, and they say that could leave a lot of homeowners drowning in mortgage debt.