California Banking Perspectives, Sacramento Business Journal

By Kevin Gould – President & CEO, California Bankers Association

In the aftermath of the Great Recession, policymakers at the state and federal levels advanced new laws and regulations to strengthen consumer protections and avoid similar economic events. While some of these laws were well-intentioned, it has gone too far. While there is a growing recognition of the overreaction at the federal level, California legislators continue to advance burdensome new laws.

Protecting consumers is essential. But so is striking a balance. Laws and regulations that drive out industry segments reduce competition and hurt consumers. In February, Federal Reserve Board Governor and the Vice Chair for Supervision, Michelle Bowman, delivered a speech indicating that, “In 2008, banks originated around 60 percent of mortgages and held the servicing rights on about 95 percent of mortgage balances…As of 2023, banks originated only 35 percent of mortgages and serviced about 45 percent of mortgage balances.”

What caused the withdrawal of banks from the mortgage market? Increases in the amount of bank capital that must be set aside when servicing mortgages, complicated rules connected to loan origination and mortgage servicing, impediments when trying to recover collateral when a borrower stops paying, heightened legal liability, and intense regulatory scrutiny and unforgiving enforcement actions are all contributing factors.

To tackle the housing challenges facing American families and making the dream of homeownership accessible, President Trump signed an executive order calling for a comprehensive review of “regulatory burdens that have driven up mortgage costs, limited access for creditworthy borrowers, and weakened community bank participation in lending.” We applaud the President and federal regulators, like Governor Bowman, for undertaking this review. It is good practice to revisit whether laws are having their intended effect and adjust accordingly.

California should do the same for the laws it has enacted. But instead, the Legislature keeps piling on. Last year, substantive policy was embedded in a budget trailer bill that discourages making subordinate mortgage loans. These loans, which can provide downpayment assistance, unlock equity to build an accessory dwelling unit, or help pay for college or medical expenses, are vital in a high-cost state where the American Dream is out-of-reach for too many.

The California Association of Realtors Housing Affordability Index measures the percentage of households that can afford to purchase a median-priced, single-family home in California. Only 18 percent of households can afford a home, according to their data. While adequate supply continues to plague the state, policymakers should encourage a business climate that incentivizes access to credit for those who are ready.

Unfortunately, the opposite is happening. Two pending measures allow borrowers to stop paying their mortgages. AB 1842 establishes a framework allowing borrowers to defer their mortgage for up to 12 months when the governor declares a state of emergency. While the industry is conceptually fine with this framework, the bill includes a private right of action that will lead to frivolous litigation and benefit trial attorneys. The second measure, AB 1847, allows those impacted by the Los Angeles wildfires to not make mortgage payments for up to 36 months. The measure’s three-year payment pause is something that can’t be achieved and places a mortgage servicer tasked with collecting mortgage payments in a conflict between the borrower and owner of the loan.

Connections between bankers and their communities run deep. They want to help those suffering from a natural disaster. The industry stepped up well before government officials introduced bills responding to the Los Angeles wildfires and legislative efforts were not enacted until many months after bankers provided relief. Nevertheless, we have offered compromise language on both measures. We hope the Legislature will take these counterproposals seriously and avoid cramming down a law that exacerbates the current trend of discouraging bank participation in mortgage lending.

Our association historically avoids claiming the sky is falling based on any single measure. But cumulatively, as evidenced by the statistic shared by Governor Bowman, the weight of legislation and regulation is having a real impact – it is not good for consumers. It is time for California legislators to take a moment to reflect, particularly since they have identified affordability as a major obstacle to financial success and wealth-building for Californians, their constituents. If legislators genuinely care about affordability, they will examine whether existing laws and those presently under consideration are having their intended impact and avoid piling on.