(May 5, 2008) Amid an economic downturn spurred in part by an ailing national mortgage market, the California Legislature has been rapidly considering a slew of mortgage-related proposals that seek to improve the market’s health and speed recovery.

Nearly 30 bills that deal with some aspect of the mortgage industry and the markets that support it have been introduced in the Assembly and the Senate this year. Proposals range from increasing aid to troubled borrowers facing foreclosure to providing the state greater regulatory authority over the servicing of home loans.

Actions to Avoid

Unfortunately, there is no shortage this year of bills that take what the California Chamber of Commerce believes to be flawed or misguided approaches to addressing the mortgage market situation.

From imposing burdensome California-specific restrictions on lenders to imposing liability on the secondary market for loans originated in California, numerous bills warrant the concern of businesses and consumers alike.

The CalChamber believes that the following principles should be considered when judging the merits of pending mortgage legislation:

• Avoiding policy efforts that create California-only rules for loan servicing and foreclosure proceedings will help encourage investments in California’s mortgage market.
• Maintaining a diversity of lending products by encouraging secondary market investors to purchase non-traditional or sub-prime mortgage loans will help maintain liquidity and keep loans more affordable.
• Ensuring that the lending process in California conforms to established secondary market standards, such as those dictated by Fannie Mae and Freddie Mac, will help keep down costs for California borrowers.
• Maintaining consistent regulatory standards between state and federally licensed mortgage lenders will keep California loans more affordable and encourage financial institutions to remain in the market.

Helpful Proposals

The CalChamber is supporting a variety of bills that make sensible changes to current law in order to help alleviate the mortgage market situation. Indeed, certain increased protections can help prevent a recurrence of some of the more problematic lending practices that were harmful to the economy and individual consumers.

The CalChamber also believes, however, that an overly restrictive regulatory environment will delay the market’s recovery and deny prospective borrowers entry into the mortgage market.

Tangible Financial Relief

CalChamber-supported SB 1055 (Machado; D-Linden) and AB 1918 (Niello; R-Fair Oaks) conform to federal law by providing tangible financial relief for struggling borrowers by excluding debt forgiven by a lender from the borrower’s taxable income.
When possible, lenders will sometimes agree to a short sale of a home as a financially viable alternative to foreclosure. Under current law, a borrower who has debt forgiven under the terms of a short sale will be taxed for this “phantom income” as if it were regular income.

At a time when the borrower can least afford it, the taxation of this forgiven debt has the potential to put these consumers one step closer to financial ruin.

SB 1055 and AB 1918 would instead exclude the forgiven debt for state income tax purposes, giving the borrower tangible relief at a time of significant financial duress. Both bills would make this tax relief temporary as well, in acknowledgment of California’s current budget shortfall and in accordance with federal tax law.

Increasing Protections for Borrowers

CalChamber-supported SB 1054 (Machado; D-Linden) provides greater protections for borrowers by closing two loopholes in California real estate law:

• The first would give the Department of Real Estate greater ability to discipline bad actors in the real estate industry by banning individuals who violate California real estate law from any real estate-related employment for up to three years. 
• Second, the bill removes a potential conflict of interest by prohibiting any real estate professional who gives an opinion of value on a property to a mortgage lender from acting as the listing agent on that property for one year. This would help to prevent the possibility of unscrupulous individuals giving false appraisals as a means to increase the odds of foreclosure in order to become the listing agent on the home.

These provisions in SB 1054 will provide increased protections for California borrowers by preventing known bad actors from committing further mortgage lending abuse and by giving greater safeguards to those potentially facing foreclosure.

Promoting Financial Literacy

In an effort to improve financial literacy in the state, Assemblyman Ted Lieu (D-Torrance) introduced AB 2123, which would establish the California Financial Literacy Initiative. Supported by the CalChamber, this bill provides Californians with the tools they need to responsibly manage the financial commitments associated with loans.

The current mortgage market situation illustrates the need for greater financial education in California. Improved financial literacy contributes to a healthier economy, and the programs and services offered by AB 2123 can help achieve this goal.

CalChamber Position

California cannot regulate its way out of the current mortgage market situation. Fortunately, efforts to remedy some of the most problematic legislation this year have been successful thanks to the cooperative efforts of legislators, legislative staff and industry representatives.

If any reforms are to pass this year, however, it is important that the Legislature reduce the number of bills by finding workable compromises on, ideally, two pieces of legislation — one addressing the product side of the mortgage market, and one addressing the foreclosure process. Additional bills that create California-only requirements or contain duplicative or conflicting language complicate this process and do not serve the best interests of consumers, businesses, or the economy.

The CalChamber will continue to work to ensure that only responsible legislation adhering to the principles stated above reaches the Governor’s desk for signature.

Staff Contact: Robert Callahan