California Senate passes mortgage default warning bill

The legislation, SB1137, would require lenders to give homeowners more - and earlier - warnings that their home loans were heading toward default.
By: Marc Lifsher: Los Angeles Times.com
The first major bill designed to help prevent more home foreclosures in California won final passage from the state Senate on Wednesday and was sent to the governor, who was expected to sign the measure into law.

The legislation, which passed on a 32-8 vote, would require lenders to give homeowners more - and earlier - warnings that their home loans were heading toward default. The bill, SB1137, would take effect immediately once it had the signature of Gov. Arnold Schwarzenegger.

The bill also gives renters more time to find a new place to live when they are being evicted because their landlord is losing the property.

A third provision authorizes local governments to force lenders to maintain property that is sitting empty after a foreclosure.

"SB1137 will make a difference right away," said the author of the bill, Senate President Pro Tem Don Perata (D-Oakland).

"This legislation is an important piece of the puzzle of how to best protect California homeowners and communities from the fallout from the nation's mortgage crisis," Perata said.

Schwarzenegger, who this year persuaded state-licensed lenders to voluntarily help homeowners get out from under costly adjustable-rate mortgages, welcomed the Perata bill.

"This bipartisan legislation provides one more tool by giving borrowers the critical time needed before a foreclosure to work with their lenders," Schwarzenegger said.

Schwarzenegger's approval became all but certain after protracted negotiations between Perata and his backers - mainly labor unions, community activists and advocates for fair lending practices - found common ground with lobbyists for the banking and real estate industries.

The finished product, said Susan DeMars, executive director of the California Mortgage Bankers Assn., provides borrowers with relief "without arbitrarily limiting access to credit or discouraging investments that are needed to restore liquidity to California's housing market."

Passage of the bill came just after the state Department of Corporations released its latest monthly lenders survey, which contained mixed news on the real estate front.

On the positive side, the state reported that the number of loans being modified each month to require lower payments jumped 49% from January to May, when 8,686 so-called workouts of loan terms occurred.

But that progress did little to stem the number of monthly foreclosures, which rose by about 5% to 13,622 during the same five-month period.

Perata and Assembly Speaker Karen Bass (D-Los Angeles) said they hoped that Wednesday's passage of the foreclosure-prevention bill would create momentum to resurrect a handful of related measures that had been killed or watered down in the Senate two weeks ago.

Bass said she was focusing on key portions of AB1830 by Assemblyman Ted Lieu (D-Torrance).

"We are developing an effective package of bills to submit to the governor in August," Bass said.

An earlier version of Lieu's bill addressed three problems linked to sub-prime loans, which were typically made to borrowers with blemished credit who couldn't qualify for traditional fixed-interest-rate loans.

It sought to prohibit stated-income loans, which allow people to qualify for mortgages without proving they have the income to make the monthly payments.

Lieu's bill also would have banned less-than-interest-only loans, whose principal increases with each monthly payment, and pre-payment penalties that make it expensive to pay off loans before they reset to a higher interest rate.

Mortgage bankers contend that negotiations are moving toward an agreement with Lieu and Democratic leaders on AB1830.

California lawmakers, they cautioned, need to be careful that any new law is in harmony with new sub-prime mortgage regulations that are expected to be issued in Washington this summer by the Federal Reserve.