When state legislatures convene for their 2008 sessions in January they are expected to get right down to business trying to find legislative measures to stave off waves of home foreclosures in their markets.
The meltdown in the subprime mortgage markets was a top-of-mind issue in 2007 as well, but lawmakers' priorities have shifted, lobbyists and industry observers said.
This year, their focus was on cracking down on predatory lenders. Indeed, nearly 40 states enacted laws that ranged from strengthening licensing requirements for mortgage brokers and lenders to stiffening penalties for mortgage fraud.
But with millions of subprime borrowers facing imminent hikes in their mortgage bills as loans reset at rates far above their initial teaser level, lawmakers' primary focus next year is likely to shift to keeping families in their homes, observers said.
Legislators in Maryland and California have already unveiled proposals to do just that, and other states are expected to introduce measures soon into the new year.
Their efforts would come as foreclosure rates continue to set records. The Mortgage Bankers Association says the foreclosure rate in the third quarter was a record 0.78%, up from what had been a record 0.65% in the previous quarter.
Robert Gnaizda, the general counsel of the Greenlining Institute in Berkeley, Calif., said he expects that addressing foreclosures will be a top priority in the country's statehouses in 2008.
"States are going to be involved next year in passing far-reaching anti-foreclosure measures, in part because of the growing [size] of the crisis," he said, "and in part because the federal government has demonstrated that it is not up to the task."
Mr. Gnaizda criticized the Bush administration's much-publicized loan-modification plan as "grossly inadequate." The plan includes agreements with major lenders to freeze rates on certain subprime mortgages, but Mr. Gnaizda and many other critics say it is too narrow and would help too few homeowners.
However, Mathew Street, the American Bankers Association's general counsel on state legislative issues, said now that President Bush has proposed some sort of rate freeze, most statehouses will probably stop short of proposing their own bailouts to avert foreclosures.
"Instead, they'll be more concerned about the process of restructuring loans, making sure it is fair and transparent, with the goal of keeping people in their homes," Mr. Street said.
Legislatures in several states, including California, Indiana, Oregon, and Nevada, have already convened panels to study how to stave off millions more foreclosures.
California Assembly Democrats, led by Speaker Fabian Nunez, said that they would propose a package to both reform subprime lending and address the foreclosure crisis. Some reform proposals include banning negative-amortization loans, stated-income loans, certain prepayment fees, and yield-spread premiums paid to brokers.
Lawmakers also have said they would propose standardizing the loan workout process for borrowers late on their payments; requiring lenders that notify borrowers of default also to notify third-party foreclosure counseling agencies, as well as giving borrowers a list of their legal rights and responsibilities in the foreclosure process; and requiring lenders to report monthly to the state on their contacts with distressed borrowers and the actions they have taken to assist them.
In Maryland, a task forced co-chaired by Secretary of Housing and Community Development Raymond A. Skinner and Secretary of Labor, Licensing, and Regulation Thomas E. Perez, in November recommended requiring licensed mortgage originators to imprint their license numbers on all recorded security instruments so that the state can track the source of problematic loans. It further recommended creating separate licenses for mortgage brokers and lenders and enacting a criminal mortgage fraud statute.
The Maryland task force also recommended that state law be amended to prohibit the filing of a foreclosure action until 90 days after the first default, and to allow the borrower to cure the default up to one day before a sale.
State lawmakers were very busy this year trying to stop lenders from making the types of loans that have caused the most problems, but Heather Morton, an analyst at the National Conference of State Legislatures, said they have been mindful, too, of not enacting measures that would ban subprime mortgages altogether.
"Legislators are trying to come up with different ways to help consumers, but they don't want to hurt the market either," Ms. Morton said. "They are very cognizant of the balancing act they have to actually do so that they don't close the doors on people with less than perfect credit trying to buy a house."
Steve Verdier, a lobbyist for the Independent Community Bankers of America, said that banking trade groups spent the last year making sure that lawmakers' legislative fixes for the mortgage crisis would not inadvertently hurt banks — most of which do not make subprime loans.
"It is very important for all policymakers at the state and federal level to understand the problems in the mortgage markets were caused by players that were not community banks," Mr. Verdier said. "Since community banks were not part of the problem, it would help if they did not have to bear additional burdens."
Minnesota bankers succeeded in making that case, said David Skilbred, a lobbyist for the Independent Community Bankers of Minnesota.
The Minnesota Legislature enacted three bills to combat the mortgage crisis, and bankers won exemptions for banks and thrifts. The measures require lenders to verify that borrowers have a reasonable ability to repay their mortgage loans, prohibit lenders from steering borrowers into subprime mortgage loans if they qualify for prime loans, make mortgage fraud a criminal act, and limit the fees charged on a mortgage loan to 5% of the loan amount.
The Legislature also strengthened the licensing requirements for mortgage brokers by requiring that they have either a minimum net worth of $250,000 or be backed by a surety bond of at least $50,000.
In Nevada, lawmakers enacted a measure that prohibits lenders from making no- or low-documentation and stated-income mortgages. Bill Uffelman, the president of the Nevada Bankers Association, said bankers successfully lobbied for an amendment to let banks use accepted streamlined practices so they do not have to fully document a borrower's ability to repay with multiyear tax returns, multiple references, and other time-consuming measures. "In the end we supported the bill because we got an amendment that we thought was workable," Mr. Uffelman said.
The New York Assembly enacted two companion bills that amended the state's 2002 anti-predatory-lending law, increasing the loan size covered by the law from the former cap of $300,000 to the Fannie Mae conforming-loan size limit, currently $417,000.
Congress has yet to pass any legislation aimed at resolving the mortgage crisis, but bills are stirring in both chambers.
Last month the House passed a mortgage reform bill that would create national minimum standards for mortgage originators, which would require that subprime borrowers have a reasonable ability to repay their mortgage or receive a net tangible benefit in the refinancing of a loan. It also would establish limited liability for securitizers that package loans in the secondary market to either rescind or cure loans that failed to meet the standards.
On Wednesday, Senate Banking Committee Chairman Chris Dodd, D-Conn., introduced a mortgage reform bill that would create even stricter standards than the House measure by toughening liability for the secondary market and excluding any preemption of state law.
