Six months after it was announced, a plan by Gov. Arnold Schwarzenegger to help struggling California homeowners appears to have had limited impact on preventing foreclosures.
A key reason: Things were a lot worse than anticipated.
Ten lenders and loan servicers that manage more than half the state's subprime loans reported modifying about 24,000 loans during the first quarter of 2008. Nearly 11,600 more borrowers were offered temporary relief from payments.
Lenders who joined Schwarzenegger's agreement last November – at the time the nation's first – also said they refinanced 10,831 borrowers into new loans, while 8,400 borrowers managed to catch up with their payments.
Foreclosures, nonetheless, remained stubbornly persistent and rose sharply in California during the same quarter.
More than 47,000 households surrendered their keys to banks during the period, a 49 percent jump from the previous quarter, according to DataQuick Information Systems, a La Jolla-based researcher.
State officials acknowledge that changes in the mortgage market have overshadowed an agreement forged in a different environment. Federal proposals for government-backed mortgages to aid refinancings are seen now as a bigger weapon against foreclosures.
The agreement's principal aim was to freeze interest rates. It was hatched amid fears that 500,000 adjustable subprime loans in California would reset within 18 months and sharply hike monthly payments. Since then, though, rates have fallen, meaning that in many cases new monthly payments won't reset significantly.
"Events have overtaken the initial effort, in that interest rates were then the big bogeyman," said Preston DuFauchard, commissioner at the state Department of Corporations.
But other problems have plagued the voluntary effort by lenders, some of them cited last November by skeptics doubtful about the governor's agreement.
"Declining prices are the current threat, and people upside down on their homes (owing more than a house is worth) are the big issue," DuFauchard said.
In a memo accompanying the figures, DuFauchard said that Schwarzenegger's plan, combined with other efforts by the state, mortgage industry and nonprofit counselors, have had limited impact on foreclosures.
The commissioner said falling prices encourage more speculators to abandon their investments. Buyers who tapped out home equity or paid little money down are walking away from homes. More owners also have defaulted on loans before their interest rates reset, he said.
"The level of default even before resets has been a little of a surprise," said Michael Krimminger, special policy adviser at the Federal Deposit Insurance Corp. "The level of delinquencies and problems even before rates reset has kind of swamped some of the benefits."
Krimminger and others also worry about pending resets for other types of loans popular during the boom years, particularly those known as "Alt A" and "pay option" loans that offered initial low monthly payments. Those could pose trouble in California after its subprime mortgage problem begins to subside late this year, they say.
Meanwhile, nonprofit loan counselors are seeing new trouble for borrowers with conventional loans, said Martha Lucey, president and chief executive officer of By Design Financial Solutions, a Fresno-based statewide loan counselor.
"It's related to declining property values," she said. "You can't refinance out of your health care crisis, job loss or divorce."
Lucey said many borrowers still wait too long before seeking help.
"We're still talking with people who call within 30 days of their foreclosure," she said.
Despite the high number of foreclosures in the state, DuFauchard said Schwarzenegger's deal is "having an effect." In the first five months of the plan, 98,925 borrowers have had their loans reworked, state records show. Even more can be helped, DuFauchard said.
"There's really nothing that's going to hit the ball out of the park," he said.
Call The Bee's Jim Wasserman, (916) 321-1102. Read his Home Front blog at www.sacbee.com/blogs.
