Monday, Sep. 29, 2008

Our View: Mortgage bill veto was wrong

The legislation would have strengthened oversight of the home-loan industry.

We're disappointed that Gov. Arnold Schwarzenegger on Thursday vetoed Assembly Bill 1830, which would have given more teeth to state regulators to help control the mortgage crisis in California.

The state has been at the forefront of exotic home loans, fueling the mortgage meltdown and causing job losses and slower consumer spending. The state should be at the forefront of reversing the Wild West atmosphere that drove the mess.

The governor said the bill by Assemblyman Ted Lieu, D-Torrance, would have only applied to state-regulated mortgage brokers, with federal-regulated entities exempt. That would create an unlevel playing field, he said in his veto message.

He said he also feared the bill would cause excessive litigation because it allowed private parties to sue, with plaintiffs being able to recover legal fees and other costs if they prevailed.

The courts can curb frivolous suits. But there is a bigger problem here. Reckless lending and lax regulation of state-regulated mortgage brokers and lenders helped get us where we are. The state must be more aggressive in controlling the problem.

Schwarzenegger said he will take administrative action to help with the crisis. In addition, the governor contends that other mortgage-related bills he signed will help.

He signed Senate Bill 1737, by Sen. Mike Machado, D-Linden. That measure will offer back-end enforcement -- suspending bad actors who violate real estate law. The bill is badly needed. The governor also signed other bills Thursday that will help with part of the mortgage crisis in California. They will offer some regulatory improvement.

The dimensions of the current crisis in the financial system extend far beyond California. But by strengthening our mortgage laws, the state can help prevent a repeat of the current mess. Doing that entails effectively regulating the mortgage brokers and lenders that caused most of the problems.

AB 1830 would have gone a long way to fix the giant hole in California's supervisory safety net. The bill had several key elements:

A Federal Reserve study found that consumers falsely believe that mortgage brokers have a duty to find them the best deal. That belief leads to misplaced borrower trust in the loans they're offered. AB 1830 would have created a broker "fiduciary duty" where the economic interest of the borrower must come first.

A major problem in the marketplace is that mortgage brokers steered borrowers to loans that were riskier and more expensive than those for which they would otherwise qualify based on their income and credit histories. AB 1830 would have prohibited the "steering" practice.

Lenders allowed high-risk borrowers to take on loans with payments that failed to cover even the interest that was due. These "negative amortization" loans result in low initial payments that increase the outstanding balance of the loan over time. AB 1830 would have banned these loans for borrowers in the subprime market.

It's clear that California's current laws and enforcement system have been insufficient to protect borrowers. The state must do all it can to see that the financial carnage does not happen again.

AB 1830 would have been a big help. Mortgage brokers and lenders offering exotic mortgages badly need the supervision set out in that bill.