Monday, Aug. 25, 2008

Mortgage reform bill should become law

At least the mortgage reform bill is still breathing. You can thank Sen. Mike Machado for that -- he didn't vote against it. He didn't vote for it, either, but by not voting against Assembly Bill 1830, he allowed the bill to pass out of the Senate Banking Committee and advance to the full Senate for a vote Tuesday. We hope it passes and we hope the governor signs it, assuming he ever resumes signing legislation.

Even if Gov. Schwarzenegger signs this bill into law, much work remains. We're far from being out of the woods in this mortgage crisis. Bankers predicted last week that when the so-called "liar loans" adjust next year, we'll see another wave of write-downs and losses. AB 1830 by Assemblyman Ted Lieu won't solve that problem or several others. But it is a start -- and a better start than we would have made if Machado had gotten his way earlier this legislative session.

Lieu's original bill passed the Assembly with six specific reforms. When it got to Machado's committee, it was gutted. That started a bitter battle that the Legislature's leadership had to resolve. Lieu's bill was revived and now has three of its original reforms.

Friday, the revised version was back before Machado's committee. The Linden senator could have killed it by voting against it, and we'd be stuck with nothing until the next Legislative session. Instead, Machado didn't vote; now we're likely to get at least a few mortgage reforms. It's not as strong as it should be, but it has important features:

Many consumers mistakenly believe that mortgage brokers have a duty to find them the best deal. That belief leads them to accept the loans they're being offered. AB 1830 would create a broker "fiduciary duty," meaning the broker has an obligation to protect the borrower's interests.

A major problem in the marketplace is that brokers steer borrowers to loans that are riskier and more expensive than those for which they would otherwise qualify based on income and credit scores. AB 1830 prohibits steering.

Lenders also allow high-risk borrowers to take on loans intended for people with high seasonal incomes. These "negative amortization" loans result in low initial payments that increase the outstanding balance of the loan over time. AB 1830 bans these loans for subprime borrowers.

It's unfair to paint Machado's only contribution as simply getting out of the way. One of the most experienced legislators on this subject, a bill he wrote that was passed last week will exempt forgiven loan principle from state taxation as a gift. Another of his bills will ban corrupt real estate agents from the industry.

All of these measures -- Lieu's AB 1830 and Machado's important reforms -- must be enacted and eventually signed into law. Senators can start Tuesday by passing AB 1830.