Home lenders offer relief

In an unprecedented move designed to save thousands of California homeowners from foreclosure, Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.

The state's voluntary arrangement with Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing covers more than 25 percent of California's subprime mortgage loans, which generally involve homebuyers with weak credit and require periodic increases in payments after initial low teaser rates.

The deal asks lenders to freeze low interest rates for subprime homeowners who reside in their property, are current in their payments and show they cannot afford a scheduled rate increase. Those homeowners who already have missed payments and who are threatened with foreclosure don't appear to benefit from Tuesday's agreement.

"To lose your home, as probably everyone knows, through a foreclosure is an emotional crash, and it sometimes takes years to recuperate from," Schwarzenegger said. "But we don't have to sit idly by to watch the American dream become the American nightmare."

Lenders could freeze rates for five years or longer, but terms will depend upon each borrower's situation, Schwarzenegger said.

Under the arrangement, the four lenders agree to contact borrowers before their rates adjust and establish a streamlined process for handling loan modifications. They also will provide data on the loans they service so the state can track their changes.

Advocates for embattled homeowners quickly praised the announcement, calling it the state's first significant move to stave off a major foreclosure crisis.

"The idea that the Governor's Office is committing to getting larger servicers to commit to loan modifications for people facing resets is important and will result in a number of people being helped," said Kevin Stein, associate director of the California Reinvestment Coalition.

"We've been in like a desert of despair. There's not been any good news, and it had not appeared the state was taking sufficient steps to intervene," Stein said. "This seems to be a significant step."

Stein said he believes no other state government has such agreements with lenders. He said he hopes more loan servicers will join the agreement.

Paul Leonard, director of the California Office for Responsible Lending and a longtime critic of the state's inaction, called the governor's move a "welcome intervention." Leonard said the program's effectiveness will rest on its oversight, but "I think the hope is other lenders will follow suit in short order both here in California and nationally."

The deal brokered by Schwarzenegger is modeled after a proposal by Federal Deposit Insurance Corporation Chairwoman Sheila Bair that asks lenders to freeze rates for subprime borrowers if they make on-time payments but cannot afford a rate increase.

Darsi Meyer, a GMAC senior director, said Tuesday "it is in no one's interest for there to be foreclosures." She urged borrowers to contact lenders before their rates adjust.

Officials of Litton Servicing of Houston and HomeEq Servicing in Sacramento could not be reached for comment.

Countrywide is considered the nation's largest mortgage lender and loan servicer. It's also the largest capital-area lender for home buys and refinancings, making more than 34,000 loans between June 2005 and June 2007 in El Dorado, Placer, Nevada, Sacramento, Sutter, Yolo and Yuba counties. GMAC Mortgage Corp. made about 2,000 loans in the region during the two-year period, according to DataQuick Information Systems, a La Jolla-based property researcher.

For months, troubled borrowers have maintained that it's difficult to persuade mortgage lenders and servicers to modify their loans. Many speak of difficulties reaching bank officials, being on hold for long periods of time only to be dropped and being told by lenders to get roommates or borrow money from friends and their church. Lenders have complained at state Senate hearings that some borrowers are loath to give up cell phones and cable TV to help them reach a deal.

And about half of borrowers in default don't initiate any contact with lenders before losing their homes to foreclosures, say nonprofit groups such as Sacramento's Neighborworks Homeownership Center.

California is one of seven states – alongside Ohio, Michigan, Indiana, Florida, Arizona and Nevada – that account for most of the nation's home foreclosures. The state has already seen 52,560 home foreclosures from January through the end of September, according to DataQuick. But the number of defaults – the first step of foreclosure when a borrower misses at least two or three monthly payments – indicates bigger problems to come.

DataQuick reported 172,220 defaults during the first nine months of the year and says about half those who default eventually lose their homes.

Regionally, 6,528 households have gone into foreclosure from January through September in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties, DataQuick reported.

About 11 percent of all home loans in El Dorado, Sacramento, Placer and Yolo counties are subprime, according to First American Loan Performance. Many of the subprime loans that borrowers committed to modify are due to reset in months ahead to higher payments.

First American Loan Performance says 12.3 percent of all California adjustable-rate loans are resetting during the last quarter of 2007. The number gradually slows next year, with 8 percent scheduled for resets in the first quarter and 6.4 percent in the second quarter. Another 7.29 percent will reset higher in the second half of 2008.

About the writer:

• Call Kevin Yamamura, Bee Capitol Bureau, (916) 26-5548.