Schwarzenegger proposes mortgage aid

San Diego Union Tribune
By Emmet Pierce

Plan calls for 90-day stay of foreclosure

In an effort to slow the pace of home foreclosures and stabilize California's shaky economy, Gov. Arnold Schwarzenegger yesterday unveiled a proposal to help borrowers modify troubled mortgages while making lenders more accountable.

The centerpiece of the plan is a 90-day stay of foreclosure for owner-occupied homes that have a first mortgage in default. Schwarzenegger today is expected to call for a special session of the Legislature to consider the strategy, along with other economic issues.

Under the proposal, lenders could exempt themselves from the 90-day stay by providing evidence that they have an aggressive loan modification program in place. An “aggressive” program is broadly defined as one that will keep troubled borrowers in their homes in cases where doing so brings lenders a greater return than simply foreclosing.

Faced with the 90-day freeze on foreclosures, lenders will be more inclined to work with borrowers, California Department of Corporations Director Preston DuFauchard said during an afternoon teleconference with reporters.

The proposed freeze “is designed to be a stick to get people to have a more aggressive modification program,” DuFauchard said. “ . . . The time value of money creates a real strong incentive to take this modification approach.”

While many lenders already are doing voluntary loan modifications, they aren't being nearly aggressive enough to resolve the foreclosure problem, said David Crane, the governor's special adviser for jobs and economic growth.

Paul Leonard, director of the California office of the Center for Responsible Lending, noted that an increase in loan modification efforts nationwide began over the summer, when the Federal Deposit Insurance Corp. took over failed lender IndyMac Bancorp. The governor's plan follows that example.

“The goal is to encourage loan servicers to adopt a more streamlined, systematic approach to loan modifications,” Leonard said. “The governor is trying to use leverage to move servicers in a positive direction.”

Mark Goldman, a real estate finance instructor at San Diego State University, said the 90-day stay may give delinquent borrowers more time to remain in their homes, but ultimately it will place greater financial pressures on lenders.

“The lender is going to just have to wait that much longer to get the collateral, and that may have some negative impacts on the pricing of loans,” Goldman said.

A new state law that requires lenders to work harder to help distressed borrowers led to a steep drop in September default notices in San Diego County, and foreclosures also declined. In many instances, Senate Bill 1137 calls for lenders to try to contact delinquent borrowers, then wait 30 days before filing a default notice.

A total of 1,206 county homes received notices of default, which mark the beginning of the foreclosure process. That marked a 58 percent decline from August and a 35 percent drop from September 2007. Around the state, mortgage servicers recorded 94,240 notices of default on homes during the third quarter. That was down 23 percent from a record of 121,673 in the second quarter and up 30 percent from third-quarter 2007, according to the MDA DataQuick research firm.

In his proposal to help distressed borrowers, Schwarzenegger suggested that loan modifications be based on a 38 percent monthly housing debt payment-to-income ratio, so that revamped loans are more sustainable. To achieve that, he suggested that lenders temporarily reduce interest rates, increase loan repayment periods, or defer part of the unpaid principal balance to the end of the loan term.

He called for the Department of Real Estate and Department of Corporations to enforce federal laws and regulations, such as the Truth in Lending Act, and discipline real estate licensees who violate such laws and regulations.

To avoid future mortgage market meltdowns, lending practices should be reformed to protect borrowers by expanding fiduciary responsibilities for mortgage brokers, Schwarzenegger said. He also called for increasing and standardizing licensing requirements for loan originators. Counseling may be desirable for borrowers entering into risky mortgages, to make sure they understand terms and obligations, he said.

Turning to underwriting, the governor urged the federal government to require loan originators to retain a portion of their loan risks to encourage better practices. Kevin Stein, associate director of the California Reinvestment Coalition, said the success of the plan will depend on the details of implementation.

“It is good that the governor is engaged, good that he has called for a special session,” Stein said. “We don't want it to be another good-sounding program that doesn't meaningfully help people avoid foreclosure.”