Foreclosure

Schwarzenegger Calls For 90-Day Foreclosure Freeze

California Governor Arnold Schwarzenegger unveiled an aggressive proposal yesterday that he says will bring down foreclosure rates in the state by helping both borrowers and lenders modify existing home loans in ways that benefit both parties, and at the heart of his plan is a state-wide 90-day halt on foreclosure proceedings. Earlier today, Schwarzenegger called a special session of the state legislature to immediately address his foreclosure relief plan, as well as other economy and budget issues.

“The single most powerful action our state can take to shore up its economy is to help Californians stay in their homes - and I am presenting a plan to do just that,” said Governor Schwarzenegger. “Curtailing foreclosures will stop the downward spiral of home prices, free up needed cash for homeowners, help save jobs and make an immediate positive impact on our economy.”

Schwarzenegger's plan encourages loan modifications with incentives for lenders and servicers. Initially, the program calls for a 90-day stay of foreclosure for each owner-occupied home subject to a first mortgage on which a Notice of Default (NOD) has already been filed. But, it also provides for a “Safe Harbor” under which lenders will be exempt from the 90-day moratorium if they provide evidence to the state's head banking official that they have an aggressive modification program already in place. The Governor's office defines an “aggressive modification program” as one “designed to keep borrowers in their homes where doing so will ultimately bring investors a better return than simply foreclosing and selling at a loss.”

Schwarzenegger seems to be following the lead of our national officials. The incentive-based modification concept was recently put forth to Congressional and White House leaders by Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation (FDIC), in hopes of rolling it out on a national scale. And as DSNews.com reported yesterday, President-elect Barack Obama has said he plans to implement a nation-wide 90-day foreclosure moratorium for “good faith” homeowners.

In addition, Schwarzenegger is proposing a standard loan modification program modeled after the one implemented at IndyMac Bank by FDIC officials, whom the Governor met with last week to discuss foreclosure prevention strategies. Similar broad-based modification models have recently been announced by Bank of America and JPMorgan Chase. Under the new program, modifications will be based on a 38 percent housing debt-to-income ratio so that the modified loan is sustainable for the homeowner. Lenders can achieve that 38 percent level by lowering the mortgage interest rate (to 3 percent, the Governor gives as an example) for at least five years; increasing the amortization of the loan to 40 years; or deferring some of the unpaid principal to the end of the loan term, so that the borrower will repay that amount upon refinancing or sale of the property. The Governor's office said these actions are expected to reduce homeowners' monthly payments by 25-30 percent.

Also, to prevent another mortgage crisis in the future, Schwarzenegger is prescribing changes to the way mortgages are brokered and originated to make lenders more accountable, guard against risky loans, and prevent prolonged market bubbles from ever arising again, the Governor's office said in a press statement. With more responsible lending, the statement said, “Californians will never again be victimized by unsustainable loans.”

Schwarzenegger is proposing that the California Department of Real Estate and Department of Corporations be able to enforce federal laws and regulations such as the Truth in Lending Act and others, and to discipline real estate licensees who violate those laws and regulations. He also wants to expand the fiduciary duties of mortgage brokers so that borrowers can be assured they are getting a loan that suits their circumstances, while penalizing lenders who make false or misleading statements. Licensing requirements for loan originators will be increased and standardized, Schwarzenegger said, and California will contribute to a national database for the public to access license status and disciplinary records of all loan originators. In addition, pre-counseling interviews will be required for borrowers entering into risky “non-traditional” mortgages, as defined by the federal government.

The Governor's mortgage plan also includes urging the federal government to require loan originators to retain a portion of the loan risk to encourage sound underwriting of loans, and encouraging the federal government to promote the use of covered bonds which allows lenders to securitize loans but requires them to retain those assets on their balance sheets, a mortgage financing option proposed by Treasury Secretary Henry Paulson this summer.

Additionally, Governor Schwarzenegger said he will continue to advocate that the federal government use a portion of the $700 billion Troubled Assets Relief Program (TARP) to buy up and modify troubled home loans or to guarantee modified home loans, as was its original intention. Schwarzenegger said he also plans to convene a housing summit in early 2009 to further craft modification and foreclosure abatement solutions for California.