Thursday, November 6, 2008

The Governor’s Plan to Reduce Foreclosures

From The Office of the Governor

Governor Schwarzenegger Prescribes Solutions to Keep Californians in their Homes

Offers Special Session Plan for Immediate Foreclosure Relief, Long-Term Mortgage Reform to Help Stabilize California's Economy

Committed to keeping Californians in their homes and stabilizing the state's economy, Governor Arnold Schwarzenegger today announced an aggressive plan to bring down foreclosure rates by helping both borrowers and lenders modify existing home loans in ways that benefit both parties. Also, to prevent another mortgage crisis in the future, the Governor is prescribing changes to the way mortgages are brokered and originated to make lenders more accountable, guard against risky mortgages and prevent unsustainable bubbles from ever arising again.
The plan is among the items the Governor will prescribe for immediate action during the special session of the legislature he plans to call. That session is needed to address both a state budget revenue shortfall and a package of legislation to stimulate California's economy.
"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."
The Governor's plan improves upon other foreclosure-relief programs by incentivizing loan modifications. To reduce foreclosures and encourage loan modifications, the Governor proposes:

  • A 90-day stay of the foreclosure processes for each owner-occupied home subject to a first mortgage on which a Notice of Default has been filed.
  • A "Safe Harbor" under which lenders will be able to exempt themselves from the 90-day stay procedure altogether if they provide evidence to the state official that the lenders have an aggressive modification program in place. An "aggressive modification program" is 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.
  • Loan modification Model: modifications will be based on a 38% housing debt-to-income ratio so that the modified loan is sustainable for the homeowner. The lenders can achieve that 38% level by invoking some or all of the following modification plans:

1.      reducing the interest rate to a lower rate for five years or more; e.g., to a rate as low as 3%;
2.      increasing the amortization of the loan to 40 years from the start of the amortization period; and
3.      deferring some amount of the unpaid principal balance to the end of the loan term, so that the borrower will repay that amount upon refinancing or sale of the property.

  • These actions will reduce monthly payments by 25-30%

Governor Schwarzenegger's plan ensures more responsible lending so that Californians will never again be victimized by unsustainable loans. In order to prevent another mortgage crisis in the future, the Governor prescribes a set of proposals, including:

  • The Department of Real Estate and Department of Corporations will now 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.
  • Lending practices will be reformed to protect borrowers by expanding fiduciary duties for mortgage brokers so that borrowers can be assured they are getting a loan that suits their circumstances and penalizing lenders who make false or misleading statements.
  • Licensing requirements for loan originators will be increased and standardized.
  • California will contribute to a national database for the public to access license status and disciplinary records of all loan originators to prevent dishonest originators from victimizing consumers.
  • Pre-counseling interviews will be required for borrowers entering into risky "non-traditional" mortgages, as defined by the federal government, to ensure they understand and accept the terms to which they are agreeing.

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.
Additionally, Governor Schwarzenegger will continue to advocate that the federal government use a portion of the $700 billion Troubled Assets Relief Program to buy up and modify troubled home loans or to guarantee modified home loans. The Governor will also convene a housing summit in the beginning of 2009 to further craft modification and foreclosure abatement solutions.
To address California's budget deficit and look at more ways to stimulate our state's economy, Governor Schwarzenegger announced he will call the legislature into special session.
These solutions build upon the Governor's previous actions to help stabilize California's housing market, including:

Bloomberg adds Schwarzenegger Seeks to Save Homeowners With Foreclosure Delay

…Schwarzenegger said he will ask lawmakers to consider delaying foreclosures when he orders them into a special session tomorrow to deal with the state's ballooning budget deficit. The measure would exempt lenders if they can prove they have set up a program to help troubled homeowners modify their loans.

Schwarzenegger said he wants lenders to adopt a loan modification plan based on a 38 percent housing debt-to-income ratio so that the modified loan is sustainable for the homeowner.

He said lenders could achieve that 38 percent by reducing the loan's interest rate to as low as 3 percent for five years, increasing the mortgage's term to 40 years and deferring the payment of some principle to the end of the loan term, when it could be paid by refinancing or selling the home.

Schwarzenegger tomorrow is scheduled announce that the state's six-week-old budget already has sunk as much as $10 billion into the red and that he'll need to seek tax increases to fix the deficit. The ballooning deficit comes as the state's already ailing economy has been hit hard by declines in the stock market that have cut into income and capital gains tax revenue.