Schwarzenegger Proposes 90-Day Foreclosure Stay

Sacramento, CA, Nov. 6, 2008--Gov. Arnold Schwarzenegger has 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.

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.”

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.

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.

To avoid future mortgage market meltdowns, lending practices should be reformed to protect borrowers by expanding fiduciary responsibilities for mortgage brokers, Schwarzenegger said.