State foreclosure moratorium has wide loopholes

(02-23) 17:55 PST -- Gov. Arnold Schwarzenegger signed into law a 90-day moratorium on California home foreclosures on Friday, but consumer advocates argue wide loopholes will prevent the legislation from significantly slowing repossessions.

The bill, introduced by Sen. Ellen Corbett, D-San Leandro, as a trailer to the California budget package, covers owner-occupied homes where the first loan was recorded between Jan. 1, 2003 and Jan. 1, 2008.

"Many people in our communities are facing the terrible specter of foreclosure," Corbett said. "I'm just trying to find a way to help."

Under the law, however, state regulators can grant loan servicers exemptions - allowing them to foreclose - if the lenders have a mortgage modification program in place that meets some combination of various criteria. Among them: a deferral of a portion of the principal, lowered interest rates for at least five years or an extension of loan terms.

"Can they defer $1,000 for 30 years and call that complying?" said Joe Ridout, spokesman for Consumer Action. "It appears that that would be following the letter of this legislation. The heart appears to be in the right place, but the teeth aren't."

In order to earn an exemption under the state law, a lender's modification program would have to include an adjustment in monthly mortgage payments "targeted" at 38 percent of a borrower's income. That's a looser standard than those already put forward in several federal programs, including the Homeowner Affordability and Stability Plan laid out by the Obama Administration last week, which sought to lower payments to 31 percent of income.

"It was a step backward from where things were going from an industry standpoint and a federal standpoint," said Kevin Stein, associate director of the California Reinvestment Coalition.

He also noted that having a modification program and actually granting loan workouts are two different things for lenders - and the law doesn't appear to speak to the latter.

Corbett said she agreed with several of the critiques of her bill, but was limited from more aggressive measures by federal banking regulations.

"I would have liked to have written a much stronger bill," she said.

Bankers, however, would have preferred she didn't write the bill at all. A letter of opposition from the California Bankers Association, California Mortgage Bankers Association and other financial trade groups said a foreclosure moratorium will create uncertainty, delay economic recovery and stifle home sales.

Beth Mills, spokeswoman for the California Bankers Association, said struggling borrowers and their lenders already have more than enough time to search for mutual solutions. A state law passed last year increased the required period from first notification to final sale by 30 days, to a total of 141. More time is not the silver bullet to every troubled loan, she said. The law will go into effect in late May.

E-mail James Temple at jtemple@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle