California Foreclosure Moratorium Goes into Effect: Which Mortgages are Covered?

The California Mortgage Foreclosure Prevention Act went into effect today. For lenders deemed to have less than comprehensive loan modification programs, the new law places a 90 day delay on some foreclosures. Though many lenders already have federal incentives to offer loan modifications, the new law will delay foreclosure on some owner occupied residences and will hopefully give California lenders further incentive to renegotiate mortgages instead of foreclosing.

Under the new law, unless they wish to wait an additional 90 days longer than normally required, lenders must apply for an exemption in order to foreclose on certain mortgages. To get an exemption, they must offer a "comprehensive" loan modification program. To be covered under the new law, in addition to the lender not having an exemption, the mortgage must:

• be secured by residential property and have been recorded between January 1, 2003, and January 1, 2008;
• be the first mortgage or deed of trust secured by that property;
• be on the borrower's principal residence at the time the loan became delinquent; and
• a notice of default must have been recorded on the property.

One potentially large hole in California's new law is that it does not cover many mortgages that are "investor owned." This leaves out in the cold many homeowners whose mortgages were securitized. That now seemingly dirty word refers to mortgages packaged into securities which were purchased all over the world. In short, these bundled mortgages are governed by contracts specifying what the servicer can and cannot do with the bundle. If renegotiating the mortgage would be contrary to that contract, California's new protection will not apply.

Additionally, the borrower cannot be in bankruptcy, and cannot have hired "an organization, person or entity whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries."

The guidelines given for loan modification resemble those enacted in federal loan modification programs by Fannie Mae, Freddie Mac and the Federal Deposit Insurance Corporation. Like the federal incentives, California's are not binding, but seek to give lenders an incentive to renegotiate. The California guidelines shoot for renegotiation of mortgage payments to 38% or less of borrower income. As discussed in February, federal guideline target payments at 31% or less of borrower income.

Unlike the federal programs, California's guidelines offer no direct money incentives to lenders or borrowers who successfully renegotiate.