California lawmaker would lean on mortgage lenders

By Jim Christie

SAN FRANCISCO (Reuters) - California state Sen. Mike Machado says his bill to tighten regulation of mortgage lenders amid the subprime mortgage market's turmoil stemmed from home loan offers hawked over the radio.

Machado grew so annoyed with the ubiquitous offers he would call their toll-free numbers to probe if the deals were above board. What the Democratic lawmaker said he found was the type of hype employed by carnival barkers to lure the gullible.

"It's like what you used to see at county fairs," Machado, chairman of the California state Senate's Banking, Finance and Insurance Committee, told Reuters in a telephone interview on Tuesday.

As many borrowers with adjustable-rate mortgages struggle to meet payments after interest rates on their loans reset, they are also saying their loans were too good to be true.

Faltering mortgages, including ones for risky subprime borrowers with weak credit histories, are propelling higher default and foreclosure rates across the United States, triggering concerns of an added drag to an already slumping homes market, which is expected to slow the broader economy.

In California, the most populous U.S. state, foreclosure filings in February rose 79 percent from a year earlier and the state last month had one foreclosure filing for every 751 households, a level 1.2 times the national average, according to RealtyTrac, an online foreclosure marketplace.

Much of that increase could have been averted had the state done a better job of ensuring mortgage lenders were not taking advantage of desperate borrowers, Machado said.

"People got into these loans without expecting to see these (interest rate) jumps," he said. "It has basically snowballed."

FULL DISCLOSURE

Machado's bill would subject state-regulated mortgage professionals to federal lending standards drafted in response to increased marketing of nontraditional mortgages.

Among the bill's top goals are requiring lenders to evaluate a borrower's ability to pay fully-indexed mortgage rates instead of just low initial rates and that loan documents spell out future payments when interest rates reset.

"I'm not sure there is full disclosure to a borrower in a manner that is understandable," Machado said. "I think it's urgently needed."

Machado said mortgage lending standards are an issue California lawmakers cannot ignore because of the importance of the housing market to the state's economy -- and a state budget always at risk of shortfalls -- and because the state is home to many prominent subprime mortgage lenders, including New Century Financial Corp. NEWC.PK

Many analysts expect Irvine, California-based New Century, the largest U.S. subprime mortgage lender until delinquencies and defaults increased, to seek Chapter 11 bankruptcy protection.

As Machado shepherds his bill through the legislature, California Gov. Arnold Schwarzenegger's office is evaluating a plan by Department of Corporations Commissioner Preston DuFauchard proposing the state bar loans to subprime borrowers unless lenders could verify their employment and income.

(For more stories on the subprime sector, please click on ID:nN16195443)