Gov. Arnold Schwarzenegger and California mortgage lenders Countrywide, GMAC, Litton and HomeEq announced today that they plan to follow the direction of FDIC Chairman Sheila Bair and institute systematic loan modifications for borrowers with resetting ARMs. This unprecedented move is expected to provide relief for tens of thousands of California borrowers and, if properly implemented, should serve as a model for other states experiencing record numbers of foreclosures.

"Loan modifications that place borrowers into sustainable, affordable loans are the best ways to stem the foreclosure tide," said Paul Leonard, director of the California office of the Center for Responsible Lending (CRL). "FDIC Chairman Sheila Bair has proposed this solution and Gov. Schwarzenegger has helped convince some lenders to adopt it. Hopefully, these lenders will set the standard, with more lenders quickly following their lead nationwide."

A recent study from the California Reinvestment Coalition (CRC) found that loan modifications were not happening in California. "Critical to this loan modification initiative is a monitoring system that will allow the state to identify who is being helped, to what degree, how quickly and by which lenders," said Kevin Stein, associate director of the California Reinvestment Coalition. "While this is a very positive advance, without adequate data and monitoring, we will have no sense of the modifications' impact or success."

DataQuick of LaJolla, Calif. recently reported that a record 24, 209 homes had been lost due to foreclosure in the third quarter of 2007, the highest home loss number since the company began collecting data in 1998. With nearly 300,000 ARMs in California scheduled to reset in the coming year, the crisis could only worsen before it improved. This model effort on the part of lenders and the state could have come at a better time only if it had come sooner.

CRL's December 2006 report Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners projected that 465,000 Californians would lose their homes due to foreclosures on risky subprime loans originated since 1998. Subprime loans are responsible for a disproportionate share of foreclosures in California and across the nation. These loans have relied heavily on risky features, including adjustable rates and stated incomes, which taken together have made it difficult for borrowers to pay their higher mortgage payments when rates adjust.

In addition to providing loan modifications for current borrowers in trouble, CRL calls for California to establish emergency funding for housing counselors and attorneys to work with these homeowners and provide adequate protections to all new subprime borrowers. Recommended policy changes include:

  • Establishing $10M emergency funding for housing counselors and attorneys to help troubled homeowners;
  • Qualifying all borrowers at the fully-indexed rate, using reasonable assumptions for debt-to-income ratios;
  • Requiring lenders to verify income, using the array of tools already available;
  • Requiring escrow accounts for subprime borrowers to cover taxes and insurance;
  • Banning prepayment penalties, which lock subprime borrowers in the subprime market.

A recent CRL analysis of the spillover effects of subprime foreclosures found that, on average, homeowners in California living near foreclosed properties will see their property values decline on average by $8,000. In California, more than 8 million homeowners would experience home value declines resulting in a total statewide loss in home value of more than $67 billion.

For more information: Ginna Green at (510) 379-5513 or

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