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California passes 90-day Foreclosure Moratorium
Tuesday June 16th, 2009
Governor Schwarzenegger signed a bill Tuesday imposing a 90-day moratorium on foreclosures in California. The bill exempts lenders who have a modification program in place meeting standards set forth in the bill, including reduction of payments to 38% of a borrower's income (higher than the 31% DTI standard in the Obama Administration plan.) Nevertheless a halt to at least some foreclosures is a key missing piece of the Administration's plan announced last week. Outside of California and apart from lenders with voluntary foreclosure freezes, homes will continue to be foreclosed while the new program, and perhaps even the legislation to allow Bankruptcy Court restructuring, is rolled out. This means not only needless home losses but also needless losses for banks, to the tune of about $125,000 per house in January.
While the Administration's new plan has some merit, it doesn't actually stop any foreclosures, which is the point. Regrettably, the Obama/Geithner plan perpetuates two basic flaws with mortgage modifications to date: payment reductions are temporary (5 years) so that we will have another payment shock crisis in 2014, and homeowners for the most part are not deleveraged, because principal writedowns are not a central part of the program. To its credit, the Administration is sticking to its guns on supporting bankruptcy stripdown of underwater mortgages, but that will still require getting past the Blue Dogs in Congress.
In upcoming posts I will report on this week's International Association of Consumer Law conference in Hyderabad India, perhaps including some topics other than the U.S. mortgage foreclosure crisis.
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