California legislators are to hold another hearing on the subprime mortgage implosion this week, and this time they will be looking to see what can be done to slow the pace of residential foreclosures.
State Sen. Michael J. Machado, the chairman of the Senate Banking, Finance, and Insurance Committee, said that a hearing set for Tuesday in Sacramento, the third this year, would examine what lenders are doing to help borrowers avoid foreclosure and what, if any, additional action should be taken to address the crisis. In an interview Thursday, the Linden Democrat said his panel has a particular interest in whether securitizations make it harder for borrowers to stave off foreclosure.
"We want to see how the secondary market affects what a servicer can do," he said. "Our understanding is that servicers are obligated to investors rather than to working something out with the borrower. When you're dealing with money circulating anywhere around the globe, the lending relationship can become rather impersonal."
Sen. Machado said the committee in particular wants to find out what lenders are doing to anticipate and reduce defaults. He distinguished between lenders that hold loans on their books and those that originate, then sell loans. Originators with sizable retail banking operations appear more likely to work with borrowers, he said.
Executives at several mortgage lenders are expected to appear at the hearing to discuss ways being used to reduce foreclosures. Wells Fargo & Co., Washington Mutual Inc., and the HSBC Holdings PLC unit HSBC Finance Corp. are expected to attend. However, Countrywide Financial Corp., which had agreed to appear, withdrew Thursday after a rocky week for the Calabasas, Calif., mortgage lender. (See story
A spokeswoman for HSBC Finance said the company plans to "share what we are doing for homeowner preservation" but declined to comment further. However, HSBC Finance has previously said that this year it began identifying borrowers at risk of default on adjustable-rate mortgages. In some cases it has suggested that customers refinance before their interest rate resets, but in more desperate cases it has delayed the reset date for up to 12 months. At the end of the second quarter, the Prospect Heights, Ill. company had modified 5,000 mortgages out of 19,000 people contacted. Calls to Wells, Washington Mutual, and Countrywide were not returned by press time.
State lawmakers have varied views, Sen Machado said, ranging from taking no action to encouraging lenders to discount interest rates. "Does the product being provided by the market need to be modified to meet the financial situation?" he said. "We hope the industry will become more responsible and extend a little more to mitigate the circumstances that we are in with subprime mortgage products."
Other options could include legislation to address possible conflicts of interest in loan servicing or the creation of a general obligation fund to assist borrowers, though Sen. Machado said these options appear less probable.
Consumer advocates and state regulators are also scheduled to testify.
The Mortgage Bankers Association says California accounted for about 14% of the nation's subprime mortgages in the first quarter, the latest period for which data is available. About 10.2% of the subprime loans serviced in California during that quarter were classified as past due and 3.7% were in foreclosure.
This week's meeting has a narrower focus than the committee's last hearing, in March, which took a broader look at subprime lending and focused on what regulators could do to address the situation. In February Sen. Machado introduced legislation to spur mortgage originators to adhere to national guidelines on nontraditional mortgages. That bill is still working its way through the legislative process, he said.
Since then, the mortgage market has deteriorated further. Several originators, including New Century Financial Corp. in Irvine, Calif., have filed for bankruptcy protection amid a pullback in secondary markets that has also fed a growing liquidity crisis. The Federal Reserve on Friday announced temporary changes in its primary credit-discount window facility, including a 50-basis-point reduction in the discount rate, to 5.75%, "to promote the restoration of orderly conditions in financial markets."
Sen. Machado said continued threats to liquidity make matters much more complicated for legislators who want to improve the climate for borrowers but are reluctant to do anything that could put more lenders out of business. "I think it is a very delicate situation," he said. "I am not trying to cast aspersion on anybody … , but Countrywide is no different right now than New Century."
Raphael Bostic, a professor of real estate at the University of Southern California, said that legislators face a major challenge to identify where the system broke down before determining a specific course of action. "Securitizations are another piece, since that's where a large portion of the capital is coming from," he said in an interview. "What would help is more transparency … and getting more accountability into the system."
