California Proposal Would Stay Foreclosures for 90 Days

[Nov 7, 2008.]

Gov. Arnold Schwarzenegger detailed a proposal to stay mortgage foreclosures for a period of 90 days in an effort to help troubled homeowners who have received a notice of default in California. The state accounts for a third of the nation's foreclosure activity each month, according to RealtyTrac.

The proposal would allow certain mortgage lenders to be exempt from the proposal if they could prove that they have an aggressive loan modification program in place. Many mortgage lenders might be more motivated to work with homeowners rather than deal with a 90-day stay on foreclosures.

The freeze "is designed to be a stick to get people to have a more aggressive modification program," Preston DuFauchard, director of the California Department of Corporations, told the San Diego Union-Tribune. "The time value of money creates a real strong incentive to take this modification approach."

California has a new state law that requires lenders to make a bigger effort to help homeowners at risk of foreclosure. As a result, there was a drop in default notices and foreclosures in the state in September.

Schwarzenegger's proposal calls for loan modifications based on a 38% monthly housing debt to payment-to-income ratio. How would this be achieved? By mortgage lenders agreeing to reduce interest rates, extend repayment periods, or defer part of the unpaid principal to the end of the loan term.

All these solutions make sense, but something more needs to be done to help educate consumers about how much debt they can and should take on. The banks are certainly at fault for aggressively promoting risky loan products to eager-beaver consumers who were desperate to own a home during the booming housing market. But homeowners also need to acknowledge they made mistakes by not doing their due diligence and assessing how much of a mortgage they could really afford.

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.