California consumer groups will have plenty to say Monday when the California Senate Banking convenes a hearing to discuss the implosion of the subprime market and its impact on California homeowners and the economy.
"Borrowers are losing homes and subprime lenders are closing their doors every day," said Paul Leonard, director of the Oakland-based California office of the Center for Responsible Lending (CRL), a research and policy organization dedicated to ending abusive financial practices. "It is imperative that California acts to prevent this crisis from happening in the future, and helps borrowers whose homes are on the line right now."
The December 2006 report from the Center for Responsible Lending, "Losing Ground: Foreclosures in the Subprime Market and Their Impact on Consumers," estimates that California will experience a foreclosure rate approaching 22 percent on loans originated in the last two years. The failure of the subprime mortgage market to adequately inform and protect consumers is a key factor in the projected home loss rate, which translates to approximately 450,000 California homes.
"Had there been standards in place that protected subprime borrowers from excessively risky lending practices, we would not be witnessing this spike in foreclosures," said Norma Garcia of Consumers Union. Foreclosures in the Central Valley, including Sacramento, are particularly high, and CRL expects the Central Valley cities of Merced and Fresno to be especially hard-hit. "I hope we learn from this experience, and that a return to sound underwriting principles is on the horizon," Garcia continued.
Paul Leonard, along with the chief economist from Mortgage Bankers Association and representatives from the UCLA Real Estate Center, U.C. Berkeley's Haas School of Business and the Mortgage Brokers Association of California will testify at 1 p.m. Monday, March 26 in Room 113 of the Capitol.
Of the several policy recommendations expected on Monday, consumer advocates especially plan to tout assessing a borrower's ability to repay their loan over the life of the loan. This recommendation is particularly applicable to adjustable rate mortgages whose interest rates can rise precipitously after two years, resulting in a payment shock that many borrowers do not expect and simply cannot afford.
"Brokers and lenders in California have been aggressively and irresponsibly selling costly loans that many borrowers cannot afford and that they do not understand," said Kevin Stein, associate director of the California Reinvestment Coalition. "California legislators and regulators must outlaw such predatory practices, and ensure that all consumers have access to credit that will help them build and maintain home equity," Stein said.
For more information: Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.