Fixing foreclosures

We cheered when Gov. Arnold Schwarzenegger joined leading Assembly Democrats this month in seeking to reduce foreclosures. The governor’s surprise move -- he had opposed most mortgage-related bills during the Legislature’s regular session -- did not lead to quick action by lawmakers, however. That’s not because the problem is any less urgent than it used to be. It’s because the problem is no less complex.

Last week, the Assembly Banking and Finance Committee held a lengthy hearing but did not act on a bill by Ted Lieu (D-Torrance) that would have required an additional 120-day delay before any home in foreclosure was repossessed and sold. Like the governor’s proposal for a 90-day delay, ABX4 4 aimed to push lenders and loan servicers to adopt comprehensive plans for averting preventable foreclosures through temporary loan modifications. But when lenders objected, Lieu decided to try a revised bill in the new legislative session starting next month.

Lenders are doing more to help troubled borrowers, and yet the number of homes entering foreclosure continues to grow. A major factor impeding loan modifications has been the resistance of the investors who actually own most of the troubled loans. Frequently, lenders sold their subprime and other nontraditional loans to Wall Street, which sliced, diced and repackaged them into securities. A trade group representing the buyers and sellers of those securities is trying to give loan servicing companies more guidance on what modifications would be acceptable, and that’s a worthy effort. But its members need to follow the lead set by federal bank regulators, state attorneys general and Fannie Mae and Freddie Mac, all of which have embraced a streamlined approach to modifications in place of impractical case-by-case reviews.

Not every borrower can or should be saved from foreclosure in an economic downturn. But it’s in everyone’s interest to give borrowers a break when a temporary interest-rate cut or other modification would cost lenders and investors less in the long run than repossessing and selling the homes. It may take an act of Congress to give loan servicing companies more freedom to modify loans owned by investors, if those investors don’t do so themselves. In the meantime, state lawmakers should focus on ways to ensure that no foreclosure takes place unless the lender checks the feasibility of modifying the loan, and to measure how well the streamlined modification techniques are working.