Doing Nothing About California’s Foreclosure Crisis Does Harm

[courtesy of California Progress Report]

AB 1830 Will Curb Abuses

By Ted Lieu
Chair
California State Assembly Rules Committee

The mortgage foreclosure crisis has devastated homeowners across California and the nation, put a gaping hole in California’s state budget, and pushed America into the verge of a recession. Last year California had a record year in terms of foreclosures—and the numbers are getting worse, not better. According to RealtyTrac, in January 2008 foreclosures were up over 454% compared to the same period in 2007. In February 2008, California had over 53,000 foreclosure filings, the most of any state.

With this rapidly accelerating crisis, the California Assembly has stepped up to offer common-sense regulations to prevent a crisis of this magnitude from happening again. In the face of these efforts at reform, a troubling response has emerged from some in the financial industry and those who do not want any change. They argue that regulatory reform may cause further paranoia in the marketplace, stifle market liquidity, and dry-up opportunities for consumer lending.

The buzzword of late has been “market liquidity.” Recently, it has become a word used to scare policymakers and consumers away from much needed reforms. Recent Federal Reserve actions have attempted to bolster liquidity, but even with drastic interest rate cuts, banks are not lending to each other and in-turn are not lending to businesses or individuals. So we are left to wonder, what would open up the credit markets?

Doing nothing is not an option. We must understand that liquidity in today’s marketplace is based mostly on perception. We don’t have a credit crisis, we have a confidence crisis. After years of questionable securitizations and lending practices, many lenders and Wall Street firms have become shell shocked, not due to government action or consumer actions, but through their own irresponsibility.

Twenty years ago, many consumers of color and in distressed communities were left out of the credit mainstream that allowed one to buy homes and finance educational opportunities. The financial industry, with pressure placed on them by the Community Reinvestment Act, responded with increased credit opportunities. Instead of offering responsible products that communities of interest desired and deserved, however, they offered products with the most risky of features, from balloon payments, to exploding interest rate adjustments, to massive prepayment penalties. Regulators, underwriters, credit rating agencies, and the lenders themselves looked the other way when it was obvious that something wasn’t right.