Friday, November 7, 2008

Loan Modification Standards May Erase Banks’ Fears of Lawsuits

The San Francisco Chronicle reports Governor proposes plan to avert foreclosures

Schwarzenegger suggests imposing a 90-day stay for the foreclosure process for owner-occupied homes that have received notices of default. Lenders could be exempted from the stay by proving they have an "aggressive modification program" to keep borrowers in their homes.

The loan modifications would be modeled on the approach used by the Federal Deposit Insurance Corp. to help borrowers of the failed IndyMac Bank. New monthly payments would have to be 38 percent of borrowers' incomes. To reach that level, lenders could reduce the interest rate, increase the loan length up to 40 years and/or defer some of the principal balance until the home is sold or refinanced. The governor's office said such modifications could cut payments by 25 to 30 percent.

State officials said the program might help about half of California households facing foreclosure.

Why would being exempted from the 90-day stay motivate lenders to participate? "The time value of money creates a really strong incentive," said Preston DuFauchard, director of the California Department of Corporations, in a conference call with reporters.

He and other officials also said the proposal would increase loan modifications by removing loan servicers' fears that they could be sued by the investors who actually own the mortgages, and by getting the majority of companies involved in working out loans, so no one company need fear it is the only one taking such actions.

"We're trying to create a world where it becomes easier for lenders to do this," said David Crane, the governor's special adviser for jobs and economic growth.

That is really what all of this is about. If there are Government-imposed standards, then any individual bank or servicer can blame the Government when the investors want to sue.