Lawmakers review untraditional loans

SACRAMENTO —  California lawmakers on Wednesday began considering restrictions on unorthodox mortgage-lending practices that have allowed hundreds of thousands of Californians to buy homes they otherwise could not afford.

About half of new home loans in California are something other than the traditional 30-year fixed loan. They may require no money down and offer variable interest rates while giving borrowers creative monthly payment options -- such as paying only the interest or even less than that.

Such low introductory payments are offered in exchange for higher charges years later, sometimes tripling or quadrupling the earlier monthly payments.

Regulators said many of these riskier loans were taken out in 2004 and 2005 and would start resetting to higher rates this year.

“The exposure to these sorts of products, the growth, is unprecedented,” Raphael Bostic, who teaches at USC’s School of Policy, Planning and Development, told a state Senate committee. “The regulatory oversight of these types of practices is relatively lax.”

Such loans have been offered to home buyers with shaky credit or lower incomes. In other cases, middle-income buyers turned to them as California’s housing prices soared in recent years. Such buyers used option-payment adjustable loans and interest-only loans to purchase houses they would have difficulty affording with 30-year fixed mortgages.

In September, five federal regulatory agencies issued guidelines calling on federally regulated lenders to better gauge borrowers’ ability to pay before selling them the nontraditional loans. About a third of such home loans nationwide are nontraditional.

California is considering similar rules for state-regulated lenders, as 24 states have done, said Sen. Michael Machado (D-Linden), chairman of the Senate Banking, Finance and Insurance Committee.