90 Day Protection Stay
The most notable aspect of California Governor Schwarzenegger’s proposal is the 90 day freeze for pending home foreclosures in California. In California, mortgages reached a high of 80,000 foreclosures during the third quarter according to data prepared by DQNews. In an effort to “help Californians stay in their homes”, the 90 day protection would give struggling borrowers more opportunity to seek out mortgage alternatives.

Increased Loan Modification Participation
As loan modifications increase in popularity, the proposal would address loan servicers’ fear of potential lawsuits. Since loan modifications essentially alter the original contract with mortgage investors, many shy away for fears of getting sued by these investors. By stimulating the amount of participation in loan modifications, the proposal hopes to address these fears by basically reassuring the lenders that they are not the only ones taking such drastic measures.

In the proposal, modifications may reduce monthly mortgage payments by as much as 25 to 30 percent through reduced interest rates, extended amortization periods, or deferred principal balances. One of the key issues is that struggling borrowers must still meet qualifying debt to income ratios (typically 38 percent).

Increased Lending Responsibility and Mortgage Reform
In addition, to avoid future mortgage problems, lending practices and loan servicers will face numerous changes and stronger oversight. Many have demanded mortgage reform in California, and Gov. Schwarzenegger has responded with stronger licensing requirements and expanded fiduciary responsibilities for mortgage brokers and loan originators in California. In addition, if borrowers were to consider obtaining “risky” mortgages, proper counseling would be made available to explain the full details of such loans.

What Do You Think?
Foreclosure avoidance and loan modifications have gained popularity in California, but some argue that such “solutions” will only slow the much needed economic recovery. Now that people have finally agreed that past home prices were inflated, the natural response would be to allow these values return to “normal” levels. However, with fears of plunging home values and increased foreclosures, these attempts to avoid foreclosures and modify mortgages seem to do just the opposite. I guess the question comes down to whether you see the recent decline in home values as a natural correction in prices, or a simple downward spiral that must be intervened?

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