California Law to Boost Loan Modifications Takes Effect

In an effort to pressure lenders into doing more mortgage loan modifications to help keep financially troubled borrowers in their homes, California is today implementing a 90-day moratorium on foreclosures.

The long-awaited moratorium, enacted in February, requires lenders to give homeowners' 90-days advance notice of a foreclosure unless the lender has in place a comprehensive loan modification program that meets certain standards. Backers say the law will make lenders try harder to work out loan modifications for at-risk homeowners before resorting to foreclosure.

"California is ground zero for foreclosures," said California Assemblyman Ted Lieu, (D-Torrance), the bill's author. "We're getting about 80 to 90,000 foreclosure filings every month. That's one every 30 seconds, so until we start mitigating the number of foreclosures, our economic recovery is going to be hampered."

Lenders not actually required to modify mortgages

Critics say the law is too full of loopholes to be of much use. They note that the law only requires lenders to have a loan modification program in place, and does not do much to actually require lenders to offer mortgage loan modifications to lenders.

"Can they (lenders) defer $1,000 for 30 years and call that complying?" said Joe Ridout, a spokesman for Consumer Action, following the bill's passage in February. "It appears that that would be following the letter of this legislation. The heart appears to be in the right place, but the teeth aren't."

Even supporters admit the law will not prevent many foreclosures, but Lieu said it will at least force lenders to show they are making an effort to modify at-risk loans.

The legislation was also opposed by the California banking industry, which said it would impose unnecessary restrictions and costs on lenders. However, most lenders are expected to have conforming loan modification programs in place shortly.

"The vast majority of large servicers should have no trouble complying. They have already complied with similar requirements at the federal level," said Dustin Hobbs, a representative of the California Mortgage Bankers Association.

Targets reduction in mortgage payments

To qualify, a lender's loan modification program must meet one or more of a variety of criteria, including a provision to reduce monthly payments to no more than 38 percent of a homeowner's income (compared to 31 percent under the Obama administration's Making Home Affordable Plan). Other possibilities include deferring part of the loan principal, reducing interest rates for at least five years or extending the terms of the loan itself.

Beginning today, lenders are submitting their loan modification programs to the state for approval. Those that are accepted will be exempt from the 90-day minimum.

The state, which along with Florida has been one of the hardest-hit by the subprime mortgage and foreclosure crisis, has had a reported 365,000 foreclosures since 2007.