California plan to avoid foreclosures

Governor Schwartzenegger and the four largest mortgage servicers have announced a plan to help homeowners with adjustable rate mortgages avoid foreclosure of California homes. Four servicers, Litton, GMAC, Countrywide, and Homeq , will offer modification to homeowners who live in the home; are not behind on their payments; and prove they can’t afford the step up.

The plan apparently contemplates a freeze on interest rates for a period, expressed in one story as being “until the housing market recovers.” The cynic in me sees this as simply putting off til later the acceptance of the fact that many of these borrowers can’t now or ever afford the terms of the loans they signed.

Keeping them in their homes just props up the market today by preventing a tidal wave of foreclosed homes and provides for a cash flow for the lender and a resident caretaker for the home until the deal expires, and it once again becomes evident that the homeowner cannot afford the loan. A freeze is not a cure.

This proposal, while laudable, is not a fix. Far more lasting benefits are offered in the bill before Congress to allow bankruptcy judges to permanently modify home mortgages. The bill would address both decline in value issue and the ever escalating interest rate on most of these mortgages.