Report Urges Overhaul of State’s Mortgage Law : Housing: A blue ribbon panel proposes a sweeping package of complex rule changes that could dramatically alter lenders’ and borrowers’ risk.

Asserting that “California mortgage laws have become traps for the unwary,” a blue ribbon panel of lawyers has issued a long-awaited report on mortgage lending and borrowing that proposes sweeping changes in California mortgage law.

The 19-member joint committee of the real property and business law sections of the California State Bar Assn. said homeowners should have “absolute” protection from lenders seeking to seize their assets to satisfy unpaid mortgage debt. But the committee suggested that it should be easier for lenders to go after commercial debtors.

The joint bar committee also recommended that California improve participation in foreclosure sales by requiring competitive bidding, advertising more widely and encouraging more involvement from real estate brokers.

The joint committee’s 85-page proposal contains a sweeping package of complex rule changes that could dramatically alter lenders’ and borrowers’ risk at a time when some real estate property values are falling and when state and federal policy-makers are wrestling with ways to shore up the nation’s ailing financial system.

Adopting the package, said Margaret Sheneman--who co-chaired the joint committee of lawyers for consumers, banks, developers, title companies and other interests--could result in “increased availability of mortgage lending credit” as well as higher prices for property sold at foreclosures.

“We are proposing comprehensive changes in the statute,” Sheneman said. “But it’s a package deal. The changes can’t be made” piecemeal.

The joint committee has no authority to impose its plan. But proposals emanating from the bar have often been considered highly influential in Sacramento, particularly on complex legal issues such as mortgage lending.

In the mid-1980s, for example, the State Bar helped spearhead a successful effort to change California laws governing foreclosure on loans secured by mixed collateral. The state Assembly’s Judiciary Committee, which has jurisdiction over such matters, “is always ready to consider new proposals, particularly if they are prepared in the thoughtful manner this document seems to be,” Gene Urbin, counsel for the committee, said of the State Bar’s report.

Under the proposed reforms, foreclosures could still take place. But the reforms would discourage holders of second and third mortgage loans from suing homeowners for any outstanding payment after a property owner’s home had been foreclosed upon and sold by the original mortgage lender.

But the joint committee’s proposal would also make it easier for lenders to seek additional monies from commercial borrowers.

Under California law now, a debtor has up to one year after a foreclosure to win back his property, thus temporarily clouding the title of any property purchased in a foreclosure sale. The bar’s proposals would make foreclosures final at sale. And in commercial transactions, the reforms would give lenders “the right to pursue the borrower for a deficiency judgment, whether the property is sold at a judicial sale or at a nonjudicial sale.”

The joint committee is expected to approve a final draft of its proposal this summer and then spearhead an effort to get legislation enacted.