California Considers Regulations on Mortgage Brokers, Real Estate Agents

According to a lawmaker on Monday:

The state should increase its regulation of state-licensed mortgage brokers, credit unions and real estate agents as a way to discourage the type of risky lending that has left thousands of homeowners in or near foreclosure.

Sen. Mike Machado, chairman of the Senate Banking, Finance and Insurance Committee, is developing a bill that would apply recent federal lending guidelines to state-regulated lenders. He also wants state agencies to more aggressively restrict practices such as low introductory mortgage interest rates and variable monthly payment options.

Such tactics lure buyers in with low initial payments before readjusting to rates that can be double or even triple the original amount, often beyond the ability of home owners to afford their California mortgages.

In some cases, they can leave home buyers owing more than their house is worth.

Given the widespread use of such lending practices in recent years, California should require real estate agents, lenders and mortgage brokers to make sure borrowers can actually afford their full monthly payments, said Machado, D-Linden. His committee heard testimony about foreclosures and risky lending practices on Monday.

The state oversight would apply to about 4,800 mortgage brokers, as well as real estate agents and some credit unions, Machado said.

In September, several federal agencies called on federally regulated lenders to better gauge borrowers’ ability to pay before using nontraditional home loans. Many high-risk loans, however, are promoted by lightly regulated state-licensed brokers.

“You’ve seen the market kind of diverge to escape the (federal) guidelines,” Machado said after Monday’s hearing. “There’s probably a role for the state to come in and apply those. And there’s a question, I think, of whether the federal guidelines are in themselves sufficient, or should we go beyond them?”

Representatives of bankers, mortgage loan brokers and real estate agents said they supported the federal guidelines but said subprime loans can be beneficial in helping borrowers who otherwise could not afford a home.

“The first thing (borrowers) ask is, how high is my payment going to be?” said Ed Smith Jr., chief executive officer of Plaza Financial Group Inc., who represented the California Association of Mortgage Brokers at the hearing. “The cost of home ownership in California is astronomical.”

Brokers should do a better job matching lending terms to individual borrowers, Smith said.

About half of new home loans in California last year varied from the traditional 30-year fixed-rate mortgages, compared to about a third of new home loans nationwide.

The federal guidelines tell lenders to avoid making loans that encourage home buyers to rely on selling or mortgage refinancing their homes before they are caught by higher interest rates and monthly payments.

Monday’s hearing comes amid continuing turmoil in the subprime lending industry and housing market. Nationwide, 27 lenders have closed their doors, and foreclosures are on the rise. Machado said he will draft state regulations for consideration by lawmakers this year.

Republican senators, however, said they are reluctant to go too far to restrict a subprime market they said can be helpful. Sen. Dave Cox, R-Fair Oaks, said potential home buyers also need to take responsibility for their own actions and not assume a mortgage they may not be able to afford.

“Subprime has given people the opportunity to buy a home,” he said. “There are sometimes, you ask yourself, can we save people from themselves?”