BILL ANALYSIS
AB 1538
Page 1
Date of Hearing: April 23, 2007
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Ted Lieu, Chair
AB 1538 (Lieu) - As Amended: April 17, 2007
SUBJECT : Housing Trust Fund: home loan refinance assistance
SUMMARY : Establishes a home loan refinance assistance program
to be administered by the California Housing Finance Agency
(CHFA) to assist borrowers who may face foreclosure.
Specifically, this bill :
1)Makes numerous findings and declarations relating to the
subprime lending mortgage market and foreclosures.
2)Provides that CHFA may accept donations from public and
private sources into the California Housing Trust Fund (CHTF)
for the purposed of assisting first time homebuyers facing
foreclosure.
3)Allows first time homeowners who are facing foreclosure due to
loan terms associated with adjustable rate mortgages, may be
allowed to refinance into fixed rate products.
4)Provides that borrowers may refinance under the following
criteria:
a) The holder of the loan agrees to wave any prepayment
penalties;
b) The borrower's income complies with current income
limits for first time homebuyers as established by CHFA;
or;
c) The Property securing the loan is the sole, primary
residence of the borrower.
5)Allows CHFA and the Secretary of the Business, Transportation
and Housing Agency to draft other regulations to carry out
this bill.
EXISTING LAW :
1)Establishes CHFA within the Business, Transportation and
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Housing Agency with the primary purpose to meet the housing
needs of persons and families of low or moderate income.
(Health and Safety Code, Section 50950. All further
references are to the Health and Safety Code.).
2)Allows CHFA from time to time to issue bonds determined
necessary to finance housing developments, other residential
structures and make interest payments on prior bonds (Section
51350).
3)Allows CHFA $11.15 billion in outstanding bond debt. (Section
51350).
4)Establishes the Homebuyer Down Payment Assistance Program and
the Rental Assistance Program. (Section 51451.)
5)Provides that CHFA is the primary agency in the implementation
of state housing policy. (Section 50154).
6)Establishes the First-Time Home Buyers Finance Committee
consisting of the Governor, Controller, Treasurer, The
Director of Finance, and the chairperson of the board of
directors of CHFA. (Section 52527)
FISCAL EFFECT : Unknown
COMMENTS :
Need for bill : According to the Federal Reserve Board, the
percentage of loans at least 30 days overdue rose to 2.11%
during the fourth quarter of 2006, up from 1.72% during the
prior quarter and 13.3% of all subprime borrowers were behind on
their payments, the highest level since 2002.
On March 19, 2006 First American CoreLogic released a research
report that predicted the volume of foreclosures likely to
result from the subprime mortgage shakeout. Looking at 26
million mortgages, including over eight million adjustable rate
mortgages (ARMs) originated between 2004 and 2006, the analysis
forecasts that 1.1 million loans originated between 2004 and
2006 will be foreclosed on over the next six to seven years,
representing 13% of the ARMs originated through purchase or
refinance from 2004 through 2006.
RealityTrac, in a 2006 Foreclosure Market Report, revealed that
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California was one of the top states in the country relative to
foreclosures. The United States Senate Joint Economic Committee
also found that seven of the metropolitan areas ranked in the
top 50 foreclosure areas are in California.
This bill is an attempt by the author to provide the state of
California the authority to assist homeowners who may face
potential foreclosure proceedings. AB 1538 is an early attempt
to get a bill in the legislative process that will provide a
vehicle for all stakeholders to discuss the rising tide of
default notices and homeownership loss in the state. For
example, Dataquick, a real estate market research firm, revealed
that in Los Angeles County the notices of default went up
113.90% as compared to the same time last year. When examining
the level of defaults statewide, the increases range from 78% to
an astounding 294% increase depending on location. Market
research analysis, media outlets and other researchers in
various forums find that the most common reasons for default are
divorce, health problems, and a death in the family. The
committee concurs with these findings, however little evidence
exist that these factors have risen so dramatically as to
reflect the current increase in defaults. The one common factor
has been the subprime fall out. Furthermore, it is the intent
of the author to assist borrowers, who through no fault of their
own, have ended up in an unsuitable product.
Furthermore, the author believes that it is also necessary to
step in to protect homeowners. With the growing rise of private
individuals and companies offering to assist people with the
foreclosure process, the potential exist for rampant abuse
targeted at people facing the pressures of extreme financial
hardship. California, which already offers a first time
homebuyer program should also offer alternatives to for people
to save their homes so that they are not further victimized by
foreclosure scams.
It is estimated that almost three-quarters of securitized
subprime mortgage originated in 2004 and 2005 were 2/28 and 3/27
hybrid ARMS. These types of loans can lead to extreme payment
shock for unprepared borrowers. A homeowner who takes out a
$200,000 ARM with a teaser rate of 4 percent, for example,
initially pays $954.83 monthly in principal and interest. When
the interest rate jumps to 7 percent, say, in the second year of
the mortgage, the payments rise to $1,320.59 a month
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The subprime market : In today's mortgage market, lenders very
rarely retain and service the loans they make to borrowers.
More commonly, a borrower obtains a mortgage loan from a lender
known as an originator. The originator typically funds the loan
with a line of credit from a Wall Street investment bank or a
commercial bank. Once the loan funds, the originator sells the
loan to a bank. The purchasing bank packages that loan with
others into mortgage-backed securities it sells to investors.
These securitized loans are at the foundation of the subprime
market. Approximately 75% of the estimated $600 billion of
subprime mortgages originated in 2006 were funded by
securitizations.
Typically, the banks which extend lines of credit to originators
require the originators to maintain a net worth or debt ratio at
a certain level. These capital levels are intended to protect
the banks, if the originator's financial condition worsens. The
banks that extend lines of credit also require originators to
buy back loans which fall into early payment default (i.e.,
loans which fail within the first few months after funding).
Early payment default buy-backs are intended to protect both the
bank that provides the line of credit and the investors to whom
the bank sells its mortgage-backed securities.
Securitization typically takes the role of the lender and splits
it into separate parts. When investors by mortgage backed
securities they are buying "bonds" that entitle them to a share
of cash paid by borrowers on their mortgage. In most cases,
when a lender has sells the mortgage to the issuer, the lender
no longer has the power to restructure the loan or make other
accommodations for the borrower. The loan servicer collects
mortgage payments and then distributes them to the issuer for
payment to investors. The securitization documents outline what
specific actions may be allowed by a servicer and typically,
they limit the options that may be available.
With so many parties and components involved, securitizations
are significantly more complicated than the traditional
borrower/lender relationship. The securitization is governed by
securitization documents and is administered by a trustee. This
separation of the functions previously done by a single lender
creates a funding mechanism that has facilitated new types of
financing and has expanded credit availability. However, the
increased complexity of the structure and the different
interests of the various securitization parties can make credit
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workout strategies more complicated than in a direct
borrower/lender relationship.
The interests and obligations of the various parties are set
forth in the securitization documents and are closely monitored
by the trustee. Further complicating the situation is the fact
that the interests of the participants might not be aligned -
with each other or with the borrower. Generally speaking, this
arrangement complicates the loan modification process
When difficulty arises in making payments on a securitized loan,
the borrower generally will not be dealing with the local banker
with whom there might be in a normal transaction.
For example, one securitization includes language that states
"in the event that any mortgage loan is in default or, in the
judgment of the servicer, such default is reasonably
foreseeable, the servicer, may also waive, modify or vary any
term of such mortgage loan (including modifications that would
change the mortgage rate, forgive the payment of principal or
interest or extend the final maturity date of such mortgage
loan, accept payment from the related mortgagor of an amount
less than the stated principal balance in final satisfaction of
such mortgage loan or consent to the postponement of strict
compliance with any such term or otherwise grant indulgence to
any mortgagor; provided, that in the judgment of the servicer,
any such modification, waiver or amendment could reasonably be
expected to result in collections and other recoveries in
respect to such mortgage loans in excess of net liquidation
proceeds that would be recovered upon the foreclosure of, or
other realization upon, such mortgage loan?."
established relationship.
Instead, the borrower will be dealing with a servicer. The
servicer has responsibilities defined in the securitization
documents that are substantially different than those of a
lender. The servicer and the trustee are responsible for taking
actions that are in the best interest of the investors who
purchased portions of the securitization. Protecting the
investors means determining the best alternative that would
bring the maximum recovery on a defaulted loan on a
present-value basis.
If the servicer determines that a workout or modification of the
loan achieves that goal, then there is an alignment of the
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investor/servicer/borrower relationship. However, if liquidation
of the collateral (through a foreclosure or other means) results
in the highest net present value of cash flows, the servicer may
be bound by the terms of the securitization to pursue this
approach to the benefit of the investor despite the resulting
detriment to the borrower.
In recent months, increasing numbers of subprime borrowers have
experienced early payment defaults on their loans. The
investment banks that provided the originators with lines of
credit have required the originators to repurchase the bad
loans, which has lowered the amount of capital these originators
have on hand to satisfy their net worth and debt ratio
requirements. Most of the recent problems experienced by
originators such as New Century, Ameriquest, Accredited Home
Loans, Fremont General, and others have been due to these
originators lacking sufficient cash to buy back all of the bad
loans they had previously sold to commercial banks and Wall
Street investment houses. The cycle worsens for the lenders
when the banks, now wary of the loose underwriting standards
that caused the early payment defaults, see the lenders failing
to meet their capital requirements and become reluctant to
extend more lines of credit to the lenders. Squeezed from both
sides by required buybacks and shrinking credit lines, over two
dozen lenders have run out of cash and shut their doors in the
last few months. Lenders that have been able to find the cash
to make required buybacks are renegotiating the repurchased
loans, then reselling them at a significant discount, taking
significant losses in the process
Suggested changes : In order to strengthen the parameters of the
program contained in AB 1538 the following clarifications and/or
amendments are needed.
1) Provide that CHFA may, in lieu of refinancing a loan,
renegotiate on behalf of a borrower to assist them with
their current loan.
2) Clarify that the program is available to borrowers who
reside in their first and only home.
3) Require that a borrower must participate in a Department
of Housing and Urban Develop (HUD) approved counseling
session.
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4) Require that a finding be made that the loan terms are
not a result of abuse by the borrower.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
California Association of Realtors (oppose previous version)
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081