In the years since the vicious, recession-inducing collapse of the housing market, we’ve learned more and more about the irresponsibility and bad practices that caused the bubble and the crash. The banks and the mortgage-servicing industry abandoned all reasonable standards in their rush to turn people’s homes and debts into the equivalent of casino chips—and the consequences have been enormous.
Fortunately, California has taken the strongest step yet to hold financial institutions accountable for their wrongdoing and protect people from illegal foreclosures. Yesterday the state legislature passed a “Homeowners’ Bill of Rights,” which would give homeowners more power in facing the institution that holds their mortgage. The state’s Attorney General, Kamala Harris, sponsored the bill. The provisions include making sure homeowners have one point of contact and can’t get foreclosed while they’re pursuing a loan modification, stronger penalties for “robo-signing” of loans, and increased rights for homeowners to sue banks if they’ve been the subject of violations. (David Dayen, a Californian who follows this issue closely, has more analysis.)
The new law builds off of the multi-state mortgage fraud settlement negotiated this spring, but goes considerably farther. Critically, it actually provides a deterrent to bad practices by banks and mortgage servicers.
The biggest factor in the foreclosure crisis is the uncertainty that comes from a mix of shoddy paperwork, careless repackaging and resale, and dramatic decline in housing values. In many cases, people are paying much more than their home is worth and they don’t even know who owns their mortgage. Many people who are facing foreclosure or eviction have done everything they thought was required of them, and a wave of local, grassroots activism has sprung up to combat unfair foreclosures.
California’s move comes at a time when national politics is losing focus on this crisis. Foreclosure hurts not just families who might lose their home, but also their neighbors and the economy generally, and yet we still haven’t done enough to fix what’s wrong. “There has been no shortage of good ideas, what has been lacking is will,” says law professor Jean Braucher, who says that there’s a sense of “foreclosure fatigue” among Washington policymakers. Well, people in neighborhoods riddled with evictions are getting tired of it, too.
What should really happen is principal reduction—the banks and servicers who hold mortgages should write them down so that people are paying based on what their house is worth now, not at the height of the bubble. The fact that people are having trouble paying for their homes is a big drag on our economy and principal reductions would help give it a boost.
Still, California’s move to increase the power of homeowners is a big step in the right direction. We need to make sure the financial industry is doing its job, and that means putting real penalties on misconduct and giving it the incentive to help people stay in their homes. California is the biggest housing market in the country, and this new law should be a model for other states. Harris, and the grassroots activists who pushed for tougher laws on mortgage fraud, should be commended.