Fix It Yourself

[January 16th, 2008]

Heather Brown is stuck with a $282,000 mortgage she cannot afford and cannot refinance without hefty prepayment penalties.

Brown, a 33-year-old account manager for a design firm, is just one of thousands of Oregonians trapped in subprime mortgages.

A college graduate on her fifth mortgage, she’s no dupe. But Brown is the first to admit she erred when she signed last August for a $352,300 home in Southwest Portland.

Like every prospective borrower in Oregon, however, Brown was operating without basic protections enjoyed by residents of many other states at a time when the Mortgage Bankers Association reports the highest foreclosure rate ever. CEOs at Merrill Lynch and Citigroup have been fired over the national mortgage meltdown, and the country’s largest mortgage provider, Countrywide, agreed last week to be bought rather than go bust.

You might think that dismal backdrop would prompt Democratic leaders, including Gov. Ted Kulongoski, Senate President Peter Courtney and House Speaker Jeff Merkley, to jump over each other to curb abuses by mortgage brokers and lenders.

States such as North Carolina, Maine, Minnesota and Ohio have passed consumer-friendly measures since the crisis began to stop such basic abuses as the prepayment penalties Brown faces. And the powerful labor unions that funded successful campaigns for Oregon’s three Democratic leaders want reform.

“We strongly support addressing the front end, where unscrupulous lenders are taking advantage of people,” says SEIU lobbyist Arthur Towers. “It’s a very high priority for us.”.

So what are the three powerful Democrats offering in the first scheduled even-year session starting Feb. 1? At a press conference Jan. 7 in which top Dems said the session would “address critical needs,” they rolled out such priorities as 24-hour state police coverage, “quality home care” for seniors, “Putting Kids First” and some minor fixes to foreclosure rules.

They ignored a mortgage bill that state Sen. Ben Westlund (D-Tumalo) is putting together with three consumer advocacy groups—AARP Oregon, OSPIRG and Our Oregon. Westlund’s bill would limit prepayment penalties, which discourage borrowers from refinancing, and would require lenders to determine that borrowers can actually afford the loans they are being offered. The measure also would eliminate “credit-spread kickbacks” that provide an incentive for brokers to present lenders with higher-interest loans rather than the lowest rate for which they qualify.

“There are more protections in this state for used-car [buyers] than for home buyers,” says Westlund, who’s running in the Democratic primary for state treasurer.

But Democratic leaders prioritized only those bills backed by all their members. They point to proposed measures that would make foreclosure slightly less complicated and unpleasant, but such changes are small. Think of the Legislature as a lifeguard: Instead of stopping people who don’t know how to swim from jumping in the water, leadership would throw life-preservers to those who have already drowned.

Westlund, a former bull-semen salesman, offers a farm metaphor: “My guiding principle is that the most important part of the process is what happens prior to and on the day of signing a mortgage,” he says. “What I’m trying to get at is catch the horse before it gets out of the barn.”

Senate and House leaders have made it clear that the more substantive fixes Westlund wants are not a priority in this session. Courtney has emphasized he wants a “smooth session” that will help rebuild public confidence in the Legislature.

Merkley has been AWOL on home borrower protections both as a legislator and a candidate for U.S. Senate. “February is more for adjusting the budget and dealing with issues that have come up since the 2007 session,” says Merkley spokesman Russ Kelley.

Rick Bennett, an AARP lobbyist, finds legislative leadership’s lack of response troubling.“If you’re going to have a special February session to deal with important issues, how could this not be one of them?” Bennett says.

AARP, OSPIRG and Our Oregon, a union-backed advocacy group, earlier found the governor equally unhelpful. In November, Kulongoski convened a task force of lending industry officials and consumer advocates to seek solutions to Oregon’s slice of the national disaster. OSPIRG’s Matt Wallace says the governor’s requirement that only proposals agreed upon by all members would get introduced gave the lending industry a veto on any real reforms.

After the first meeting, the three groups quit, expressing “deep disappointment” in a Nov. 15 letter that the guv set up a process so easily “subverted.”

Kulongoski’s response read as if it were penned by the mortgage industry. He blamed borrowers for their irresponsibility, while noting that foreclosure is a headache for lenders. “I find it particularly troubling that over half of those who face foreclosure never take the simple step of contacting their lenders—even though foreclosure is rarely in a lender’s best interest,” he wrote.

While Kulongoski, Merkley and Courtney see no urgency in helping borrowers, the man Merkley hopes to unseat in the U.S. Senate does. On Dec. 20, President Bush signed a law written by Sen. Gordon Smith (R-Ore.) that made mortgage insurance tax-deductible for people making less than $106,000 annually—which amounts to millions of homeowners and about 90 percent of Oregonians.

Brown calls it “ironic” that it’s Smith who’s more helpful, and wishes the Democrats who control Oregon would do more. “I’m just disappointed the laws offer so few protections for borrowers,” she says.