The same California Legislature that failed this year to fix the state’s prison system, water supply and budget now wants to solve the home mortgage crisis. But legislators need to realize that government has only limited power to forestall foreclosures — and that political grandstanding could easily add to the financial carnage.
Assembly Speaker Fabian Nuñez, D-Los Angeles, and other legislative Democrats last week called for a special session of the Legislature to address mortgage foreclosures. The Democrats unveiled a package of proposals to address the crisis, including measures to tighten restrictions on lending practices.
Such proposals would do little to stem the tide of foreclosures, however. Government cannot change the terms of existing loans; only lenders and borrowers can agree to restructure the loans, which many are already doing. The legislation could only affect future mortgages, not the many loans in danger of default now.
And existing mortgages are the real crisis, especially the higher-cost subprime loans offered to people with poor credit. Democrats said foreclosures on subprime loans from 2005-06 could cost the state $3 billion in property taxes and $1 billion in sales and transfer taxes. Foreclosures have hit the Inland region at a rate of 1 out of every 43 homes since July, and a report released last week by the U.S. Conference of Mayors said the housing slump could cost the region $2.3 billion.
But about all politicians can really do is inform borrowers of their rights and cajole lenders into renegotiating payment terms. Gov. Schwarzenegger’s November agreement with four lenders, for example, mostly amounted to a promise to freeze interest rates on adjustable rate mortgages to keep homeowners out of default. And that voluntary effort only covers about a fourth of the 500,000 subprime loans in California.
The Democrats’ proposals include ending incentives for lenders to push high-cost subprime loans onto borrowers who could qualify for cheaper mortgages, and requiring lenders to verify that a borrower has the means to repay a loan. And the package includes a ban on prepayment penalties — fees on borrowers for repaying a loan early, which discourage refinancing.
But reining in abusive lending practices is not as clear-cut as politicians might think. Many of the mortgage deals now under scrutiny exist to help more people qualify for money to buy homes. Restrictions that protect consumers at the expense of drying up credit would deprive many Californians of any chance to own a home.
Nor does government have the responsibility rescue people from their own reckless financial decisions. Not everyone facing foreclosure is a victim of unethical lenders; some just exercised poor judgment.
The issue calls for a light touch and a carefully calibrated balance, neither of which has been a hallmark of California’s polarized Legislature.
The surge in foreclosures creates heavy personal and public costs, certainly. But wise legislators will understand that government can at best be only a bit player in this tragedy, and will not dangerously overplay their role.
