Commentary: Foreclosure relief plan needs work

This editorial appeared in The Merced Sun-Star.

Gov. Arnold Schwarzenegger has grasped a fundamental fact about the current economic downturn.

Unless California boldly addresses the root cause of the problem, rising home foreclosures, the economy and state revenues will continue their downward spiral.

As part of the emergency special session he called on Thursday, Schwarzenegger has proposed immediate foreclosure relief and long-term mortgage reform.

As David Crane, the governor's special adviser for jobs and economic growth, said Wednesday, to protect the California economy, the state needs to keep more people in their homes.

So the administration is crafting a bold proposal to encourage lenders to do more loan modifications.

The key element is a 90-day stay on foreclosures unless loan servicers adopt a "robust modification program" similar to the one pioneered by the Federal Deposit Insurance Corp. after it took over California-based IndyMac Bank.

Under that model, the lender (or its loan servicer) goes through all loans where borrowers are 60 days late and paying more than 38 percent of income in monthly payments.

These loans are reworked with lower interest rates, longer terms or smaller principal amounts so that a borrower's monthly payments for principal, interest, taxes and insurance equal no more than 38 percent of income.

Then the lender or servicer sends out offer letters in waves, first to those closest to foreclosure, telling borrowers what their new monthly payment would be if they come in, verify their income from tax returns and finalize a modification deal.

This model is a good starting point.

To read the complete editorial, visit The Merced Sun-Star.