California, New York Lend a Hand to Struggling Borrowers

The real estate and mortgage industries are busy battening down the hatches for the inevitable tidal wave of regulatory reform. Meanwhile, Housingwire.com reports government officials are already hard at work trying to outdo each other as the protector of the “everyday common household victim” of our “national crisis.”

Two illustrative examples of regulatory restructuring have been rolled out in last two months. In New York State, legislators passed a series of measures essentially placing a one-year moratorium on foreclosures. Under the program, borrowers already in default will pay a nominal monthly sum and be eligible for state funds to supplement existing mortgage obligations.

In California, lawmakers passed legislation that would require more extensive notification for delinquent borrowers before the foreclosure process can begin. Homeowners would be entitled to meetings with servicers to learn their restructuring options, placing a greater onus of responsibility on servicers to reach out to borrowers prior to beginning foreclosure proceedings.

Both measures are designed to ease pressures on distressed borrowers, but the New York plans go well beyond those in California. The California laws are designed to ensure increased communication between borrower and lender. The New York law is designed to put a halt to the process of foreclosure, presumably to await more extensive reforms or bailout plans still to come.

In both states, these measures mark the tip of the iceberg in the process of reforming regulatory frameworks for mortgage lending. In this election year, public support is swelling for pieces of legislation like these and even larger moves are likely on their way.

The challenge for regulators -- and the lobbyists so generously pleading their case -- is to enact rules and enforcement schemes that prevent fraud and predatory lending, without being too constrictive to legitimate business. Many such rules already exist; it remains to be seen if the fallout from the collapse of the mortgage industry can convince regulators to enforce their own rules.