Risky loans in spotlight

first_imgA key Democratic lawmaker said he wants to tighten regulations on mortgage lenders in the wake of a spike in foreclosures by borrowers of subprime home loans, the adjustable-rate mortgages that have saddled high-risk borrowers with exploding house payments. Until recently, when a number of subprime lending institutions collapsed, subprime lending was the fastest-growing segment of the mortgage market as lenders opened up home buying to those unable to qualify for conventional mortgages. But foreclosures are devastating families unable to make the escalating payments, said Sen. Mike Machado, D-Stockton, and are also threatening the overall economy. “I don’t think there are any quick fixes,” said Machado, the chairman of the Banking, Finance and Insurance Committee, after listening to more than two hours of testimony at an informational hearing. “But … there are real people being affected by this.” The crisis is just the tip of the iceberg, said Paul Leonard, director of the Center for Responsible Lending’s California office in Oakland, a nonprofit, nonpartisan research and policy organization. Leonard, who testified at the hearing, predicted nearly a half-million new foreclosures in California over the next several years among 2.2 million nationwide. “Some would say it’s the price of doing business for risky borrowers,” Leonard said. “There’s plenty of blame to go around among brokers, lenders, rating agencies, investors and most importantly, California regulators.” The Department of Corporations has only 25 examiners to oversee 4,800 licensed mortgage brokers, Leonard said, “so clearly, we don’t have enough resources to stay on top and find problems in a timely fashion. We can’t in good conscience abandon homeowners who’ve been harmed by rampant subprime loans.” Machado criticized the Department of Corporations’ tepid approach to regulating mortgage brokers, responding incredulously when Commissioner Preston DuFauchard said he sent out letters to brokers asking them to consider stopping so-called stated-income loans, where there is no verification of a borrower’s employment or income. “My question is, could he issue a regulation or order to put that in place?” Machado said after the hearing. “I say, yes he can. He has the power. I think he should have been very pro-active.” A web of mortgage brokers, many of whom are real estate agents, write the original loans before selling them to larger financial institutions, said Nancy Wallace, a professor at UC Berkeley’s Haas School of Business. What’s needed, she said, was more oversight to ensure the original lenders follow truth in lending laws and let borrowers know up front about fees and rising mortgages they’ll be facing – or whether they should take a loan at all. “\ will get ahead of themselves in terms of how contracts are priced, in how they manage risk,” she said. “And there are people who get ahead of themselves by pushing the envelope and exposing themselves or deceiving borrowers. … So, California has an important if not regulatory, responsibility in oversight of origination practices.” The subprime lending woes could exacerbate the already slowed housing sector, which could then bring the nation’s economy to the edge of a recession, said Stuart Gabriel, professor of finance and economics at the University of Southern California’s Marshall School of Business. “There’s a possibility,” Gabriel said, “that the housing sector could have a significant depressing effect on the economy.” Industry officials said they hope a backlash won’t kill subprime lending, which they said was a key to homeownership to millions around the country. [email protected] (916) 441-2101160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set!last_img read more