According to Darrell Steinberg there’ll be a budget vote next week.  Thanks for leaving the cone of silence to let us know, pal!  In the meantime:

• The judge who allowed furloughs for state workers to go through is saying that the order does not necessarily apply to employees of Constitutional officers.  Jon Ortiz discusses the ramifications at The State Worker.  The first furlough day, by the way, is set for tomorrow.

• The editorial board revolt in the Central Valley, hard-hit by the economic crisis, continues.  The Merced Sun-Star is unusually blunt: “Why should Democrats negotiate if Republicans refuse to budge?”  And the Stockton Record is actually calling on its readers to take action in a way I’ve rarely seen from a local newspaper.  Something is different.

• The UC Board of Regents approved an overhaul of the admissions process. President Yudof hopes that the changes will increase socioeconomic diversity, thus increasing other sorts of diversity.

• This is an incredible story about ACORN saving a couple’s home from foreclosure in Oakland.  While the Feds do little to stop foreclosures, community organizing is making things happen.  But they’re destroying the fabric of our electoral system!!! /peak wingnut

• OC Progressive asks you to  name the conservative, and it’s not who you think.

• The May Day lawsuits, stemming from police brutality and tear gassing after a pro-immigration rally, have finally been settled, to the tune of $13 million dollars.

Democratic legislative leaders are in Washington today arguing for increased stimulus money for California.  I’ve been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.

However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here.  It’s no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure.  That’s almost $4 billion dollars worth of foreclosures in Stanislaus alone.  In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.

Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire […]

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit’s as the highest of any major metropolitan area in the U.S.?

Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while.  But foreclosures have a disruptive effect on the greater economy.  They hurt property values, they hurt banks, and they hurt employment.  The crisis is only slated to grow if nothing is done, with homeowners of every income class affected.  And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively.  By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort.  Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)

Time is of the essence. I commend the incoming Obama Administration for pledging up to $100 billion from the Troubled Assets Relief Program (TARP) to help distressed homeowners stay in their homes. In California, which has the highest number of foreclosures in the nation, we experience one foreclosure filing every 30 seconds to 1 minute. The TARP funds, which the U.S. Senate recently released, should be immediately put to use to rescue homeowners from foreclosure. Our economic recovery will not begin until we slow down the astronomical rate of foreclosures and stabilize the housing market.

Strategic direction is of the essence. The haphazard strategy of the Bush Administration’s use of the initial $350 billion in TARP funds resulted in the following: more foreclosures, less market confidence, and zero benefits for the ordinary citizen. How does giving yet another $20 billion to Bank of America so it can complete its purchase of Merrill Lynch’s brokerage arm help anyone on Main Street? Answer: it doesn’t. The only people this TARP money under the Bush Administration has been helping have been Wall Street firms. It is time for change and January 20th cannot come soon enough.

State efforts are of the essence. Helping our economy recover will require the combined efforts of both state and federal resources. In California, I introduced the California Foreclosure Prevention Act to provide immediate foreclosure relief. This Act imposes a foreclosure moratorium, but allows lenders to avoid the moratorium if they have a comprehensive loan modification program designed to keep people in their homes. Swift passage of this Act will complement and enhance proposed federal efforts. We need action and we need it now.”

However, more needs to be done.  Earlier this month, Democratic Senators got Citigroup on board for what is known as “cramdown” legislation, which would allow bankruptcy judges to restructure mortgages that would give homeowners the ability to pay them.  The lenders take a haircut but it’s a better situation for them than foreclosure, and those who get to keep their homes can continue to contribute to the economy.  It’s a great idea and a major step toward reforming the hideous 2005 bankruptcy bill.  Yet despite supporting it, Obama’s team doesn’t want to include this reform in the economic recovery package, which I think is a mistake.

President-elect Obama and his advisers are resisting attempts to include a provision in the economic stimulus bill backed by congressional Democrats that would allow bankruptcy judges to shrink mortgages.

In a hastily convened Democratic Caucus meeting last week, Obama economics adviser Jason Furman made it clear to lawmakers that Obama thinks the so-called “cramdown” provision would cost GOP votes and endanger bipartisan support in the Senate.

He committed to dealing with the issue after the bill passes, as did House Speaker Nancy Pelosi (D-Calif.).

Lead supporters of the cramdown provision say the time to deal with the issue is now. Rep. Jerrold Nadler (D-N.Y.) said it’s worth losing some Republican support to help homeowners.

“I would take that risk,” Nadler said. “I don’t think you’re going to get a lot of Republican votes anyway.”

This is absolutely correct by Nadler, and risking a few votes on the margins is no reason not to limit foreclosures now.  There is an urgency here, because each foreclosure hurts the housing market more and makes it less liable to recover quickly.  We cannot wait a few months for the sake of political expediency.  Cramdown needs to happen fast, particularly for us in California.

(Assemblyman Lieu has been a leader on the foreclosure issue.  Welcome him to Calitics. – promoted by David Dayen)

        Albert Einstein once said that insanity is doing the same thing over and over again and expecting a different result.  Wall Street and Treasury Secretary Henry Paulson have continued to ignore the home foreclosure problem, despite clear and urgent warnings from consumer groups, legislators, and regulators.  Virtually none of the $8.5 trillion in federal taxpayer bailout commitments is directed towards helping reduce foreclosures.   So it should come as no surprise that new data from the Mortgage Bankers Association shows that foreclosures have increased 76% compared to a year ago to hit yet another record high, with a record 1 in 10 Americans now experiencing mortgage trouble.

The problem is particularly acute in California, which accounts for one-third of the nation’s foreclosures.  California alone has 54 percent of all foreclosure filings on adjustable rate loans.  

         Despite the massive foreclosure meltdown, Wall Street and Treasury Secretary Paulson continue to believe a top-down solution of injecting taxpayer bailout money to private Wall Street companies will somehow help our economy.  How does giving hundreds of billions of dollars to large banks so that they can gobble up other smaller banks help homeowners?  How does injecting AIG with $150 billion of taxpayer funds help keep distressed homeowners in their homes?  The answer is those solutions do nothing to address the core problem of unmitigated foreclosures.    

        It is precisely the record number of home loan defaults that is causing the current credit and liquidity crisis.  AIG and numerous other Wall Street institutions collapsed because of rising home loan defaults, not the other way around.  It is insane to keep pouring federal taxpayer money down the Wall Street sinkhole while doing nothing to help reduce foreclosures.  None of Treasury Paulson’s solutions to benefit Wall Street have helped the problem; his solutions have only made our economy worse off.  We cannot keep doing the same thing expecting a different result.  

         It is time for Treasury Secretary Paulson to listen to Federal Reserve Chair Ben Bernanke and FDIC Chairwoman Sheila Bair, both of whom are calling for loan modifications to keep people in their homes.  Bernanke and Bair have been far more prescient, insightful, and rational than Paulson has been.  Until we change our policies, home foreclosures will continue to rise, Wall Street firms will continue to collapse, and our economy will continue to suffer.        

         Wall Street banks should also be ashamed of themselves for not only opposing past attempts to reform the mortgage market, but also current attempts to help alleviate the foreclosure crisis.  The California Foreclosure Prevention Act sets a 90 day foreclosure moratorium unless the lender has a comprehensive loan modification program designed to keep people in their homes.  Wall Street should not only stop opposing this bill, they should embrace it because this is one of the solutions that might actually keep them from going out of business.

Ted W. Lieu is Chair of the Assembly Rules Committee and author of the California Foreclosure Prevention Act

I STILL haven’t had a moment to process the still-brewing outcome of Election 2008 here in California, but there’s not much time to savor or despair about the results.  A new session of the Legislature has been called, and Arnold is starting off by calling for a tax increase:

Gov. Arnold Schwarzenegger called today for a temporary 1.5-cent increase in the state sales tax to help close an $11.2 billion deficit in the state budget, as well as new taxes on liquor and oil production.

Schwarzenegger also proposed one-day-a-month unpaid furloughs for state workers for the next 17 months, as well as rescinding two of the workers’ 13 paid holidays.

There are also massive spending cuts planned, $4.5 billion in all, including $2.5 billion on primary school education.  This is all happening because we have a short-term deficit of maybe $10 billion dollars, with an additional $13 billion dollar shortfall estimated for next year.  In all, by the middle of 2010, the projections are that we will be $24 billion in the hole.

This proposal is completely and utterly insufficient to deal with that.  A sales tax increase is regressive and there’s no way around that.  Part of the proposal to extend the sales tax to services like “appliance and furniture repair, vehicle repair, golf fees, veterinarian services, amusement parks and sporting events,” according to the LA Times, and this is part of Karen Bass’ restructuring of the revenue side.  And an oil extraction fee is deeply needed.  We’re the only oil-producing state in the country that does not charge oil companies to take our natural resources.

But the cuts are pretty cruel.  And education isn’t the only thing on the chopping block.  The Governor wants to eliminate dental insurance through MediCal for poor Californians, cut welfare subsidies, and reduce services for the elderly, blind and disabled.  Hey, they don’t have lobbyists, right?  And this proposal somehow snuck into the package:

• Relaxing some state labor regulations dealing with meal and rest periods, overtime exemptions and work schedules.

Hey, it wouldn’t be a Republican plan if there wasn’t some giveaway for business.

There is no question that the state’s finances are in the worst shape since the Great Depression.  But those Californians doing well have shown, as Robert notes today, a desire to pay for those services that can make this a great state.  It’s aberrant for people who are wealthy to pull up the drawbridge and have no concern for the least of society.  Their continued economic good fortune depends on the stability and security of all citizens, as a rising tide lifts all boats.  We have been in a constant state of economic crisis for going on eight years because nobody will admit what needs to be done – to have a revenue structure that doesn’t reflect the boom-and-bust cycles of the greater economy.

A couple of the things that Schwarzenegger is doing make sense.  He is calling for a 90-day moratorium on foreclosures so lenders can work out loan modifications with borrowers, something President-Elect Obama has already proposed and which will improve our economy (a foreclosure costs something like $250,000 a piece to the economy).  And his proposal would speed public works programs as a kind of statewide stimulus package.  But the very first thing that can be done is to reinstute the automatic VLF increase that Arnold cut and is now scrambling to cover, which would cost the equivalent of $12 a month for most Californians.  But Robert Lehman at SEIU has outlined a new progressive version of the VLF that I think would increase revenue and help protect the climate.

Dedicated Revenues. VLF revenues, based on up to 0.65% of vehicle market value, are dedicated (CA Constitution Article 11, Sec. 15, implemented by Proposition 47 in 1986) to cities and counties; some additional VLF revenues above 0.65% may also be partly dedicated to cities and counties, depending on current statutes. It is unclear whether additional revenues from a vehicle GHG-emission-based component of the fee, rather than the vehicle market value, might be obligated to cities and counties. GHG component revenues should be made available for other dedicated purposes, such as improving State transportation GHG emissions through R&D, energy infrastructure improvements, transportation equipment subsidies or incentives, etc.

Progressivity. The VLF is currently based on a flat 0.65% rate applied to the current estimated market value of the registered vehicle. Owners of newer and more expensive vehicles with higher current market values pay higher level fees, while owners of older and less expensive vehicles pay less.  People without vehicles who use mass transit, bicycles, or other forms of transportation do not pay the fee. The 2003 reduction of the VLF heavily benefited Gov. Schwarzenegger for example, with his ostentatious fleet of Hummers, while mass transit riders did not benefit at all.

With this flat fee structure, the VLF still absorbs a larger share of low-income vehicle owners’ household income than it does for upper income Californians; the VLF’s moderate regressivity is similar to that of the sales tax in terms of its relative burden on the lowest income quintile compared to the upper quintile (see UCB Incidence paper below, and CBP, “Options for Balancing the Budget: Reinstating the Vehicle License Fee,” 5/8/02, p.2). A more progressive alternative exists. Rather than assessing the fee on the full value of the vehicle as California has done, Virginia exempts the first $5,000 of vehicle value, making the fee more progressive. With a $5,000 exemption, for example, an estimated one third of California vehicles would be exempt from the VLF and owners of slightly higher value vehicles would pay significantly less. The exempt value could be adjusted over time. A restored VLF should initially be based on vehicle value, with a significant deductible amount from this value, and a rate probably set above 2% to compensate for lost revenue.

This is a smart idea and should be the first counterpoint that the state Democrats propose.  At some point we must start raising revenue sensibly.  Furthermore, doing anything before December 1, when a net of 2 new Democrats in the Assembly and possibly 1 new Democrat in the Senate join the team in Sacramento, would be ridiculous.

Over the weekend, Assembly Democrats were very firm in their desire to see significant mortgage reform as part of any special session in the Legislature in November.  This is a crisis for the state that has a large impact on the greater economy.  At a recent speech I attended, Bill Clinton estimated that each foreclosure costs the economy $250,000 in lowered property values, maintenance and opportunity costs.  So demanding real mortgage reform is keenly sought.  The Assembly has been screaming for this since September 2007, and the unholy alliance between the governor and mortgage banking interests has squashed any real reform.  And in the meantime, foreclosures have skyrocketed in the state.  One in three homes experiencing foreclosure in August was in California, affecting over 101,000 homes (or one every thirty seconds).  The news got better in September, but only because of the one meager law that the governor allowed to get through, which included a 30-day waiting period where banks must contact the borrower in question before introducing foreclosure filings.  That’s a stopgap measure, and if nothing further is done, October and November will show a spike.

Here’s a portion of the letter to the governor from Assembly Dems.

We understand you are considering calling a special session to address the state budget.  Four billion dollars of last year’s budget deficit is attributable to the foreclosure crisis and billions more will be lost this year if nothing is done to address the crisis.  The special session would be an appropriate time to address California’s mortgage system.

Stabilizing the mortgage mess doesn’t just make economic sense, it’s a moral imperative.  Unless you want Arnoldville tent cities popping up throughout the state, something must be done and as soon as possible.  And while this is best determined at the federal level, we have the ability to go to great lengths to fix this, as other states like North Carolina and New York have done.

Arnold vetoed AB 1830 and consigned homeowners to a pretty cruel fate.  He needs to be pinned with that failure and pressured to change course.  I’m glad that Democrats in the Assembly are making it a priority.

Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial.  The initial suit alleged that Countrywide engaged “in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.”  At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn’t want to face a jury at a time when the financial industry is melting down.

This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:

Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:

The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:

• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;

• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;

• Waiver of late fees of up to $33.6 million;

• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;

• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and

• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.

This is exactly what should have been in the bailout bill – a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes.  It’s arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure.  In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that’s at the root of the financial crisis.

These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor – banning predatory lending and unsustainable mortgage loans.  Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.  

This shouldn’t be Jerry Brown’s job, but the systemic failure fell to him, and he performed brilliantly.  And he’s not done:

And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.

Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown did so much more.

That’s the only explanation I have for him vetoing AB1830:

Gov. Arnold Schwarzenegger vetoed a proposal today that would have imposed tougher restrictions on mortgage brokers, such as banning them from issuing exotic loans to subprime borrowers that cause balances to grow rather than shrink over time […]

The bill by Assemblyman Ted Lieu, D-Torrance, would have banned subprime borrowers from obtaining “negative amortization” loans, agreements that offer low initial payments but increase the principal balance over time, boosting interest costs and making them difficult to pay off.

AB 1830 also would have specified that mortgage brokers owe a “fiduciary duty” to borrowers. It would have prohibited brokers from steering borrowers toward higher risk loans than they would qualify for based on their income and credit. And it would have capped prepayment penalties for borrowers who want to refinance their loans to seek better terms.

Schwarzenegger, in his veto message, said the bill had laudable goals but that it “overreaches and may have unintended consequences.”

Overreaches into the profits of his mortgage lending industry buddies, that is.  Schwarzenegger’s concerns about putting state mortgage brokers at a “competitive disadvantage” compared to their unregulated federal counterparts is easily managed (like forcing anyone who does business in the state to work under one standard) and just a pathetic excuse.

We are in crisis mode on Wall Street right now because mortgage lenders, pressured by investment banks and securities markets, abused the process and came up with all sorts of exotic schemes to get borrowers into homes.  This bill would have curbed the worst practices of the industry.  The Governor would rather they continue.  He would rather mortgage lenders rip off their customers.  He would rather the economy sink into a deep recession.

One unexamined aspect of the Governor’s character is how much of a mindless puppet he is for Chamber of Commerce interests.  Let this be another example.

More like this, please:

While other cities are hoping for federal aid to help them address the problem, Lancaster is using city funds to buy, renovate and sell vacant homes. The need is clear….

So far, Lancaster’s Redevelopment Agency has agreed to spend more than $4.1 million to acquire and refurbish 41 homes. The city took ownership of the first six properties beginning in May….

Lancaster’s program mainly targets depressed neighborhoods. The city is paying between $80,000 and $110,000 for the properties and will accept bids from contractors to renovate them. Proposed repairs would include environment-friendly features such as drought-tolerant landscaping and tankless water heaters. When sold, the city hopes to recoup the price paid for each home, including the cost of renovation. But Brubaker said the goal is to keep the selling price reasonable for a family of four whose income does not exceed about $71,800 — California’s average salary for qualifying for subsidized housing.

This is precisely what governments need to be doing right now. The right-wing effort to use government to stimulate homeownership has been a catastrophic failure, leaving the global economy in ruins, millions of families bankrupt and without a home, and California facing a very uncertain future.

Lancaster’s model is more along the lines of what should have been tried all along, and what is now a priceless opportunity. The foreclosure crisis has left cities like Lancaster with a huge glut of empty houses while everyone else struggles with still-high housing costs, as homelessness rises. It’s a small move to rectify a massive misallocation of capital and resources, but the bubble’s collapse provides opportunities for affordable housing that should be seized.

It’s good that Lancaster is also promoting sustainable renovation, something that is often overlooked in the foreclosure crisis – too many cities simply want to recreate a failed 20th century model of car-dependent, resource-wasting suburbia. And Lancaster’s move isn’t a long-term solution nor a sign that suburbia is still viable – we do still need to redefine the California Dream by promoting greater urban densities. But that doesn’t preclude governments from using the foreclosure crisis to create truly affordable opportunities for Americans to own homes.

The details matter, and the public has to be engaged to ensure that cities don’t use this as a way to give away refurbished properties to developers or speculators. Still, it’s good to see some California cities getting smart about how to deal with this crisis.