State legislator pushes for wider mortgage rescue

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Amid concern that many Californians would not qualify for assistance from the federal anti-foreclosure plan, a powerful state legislator called on the Obama administration to make more homeowners eligible.

The plan limits federal refinancing assistance to people who owe just a small amount, 5% or less, over what their homes are worth.

But Assemblyman Ted Lieu (D-Torrance), who has a strong interest in lending issues, said Friday that that’s not enough to help Californians, many of whom owe significantly more than that.


“Many distressed homeowners in California are underwater by more than 5% on their home loan, which makes them ineligible to apply for refinance assistance,” said Lieu, author of a state foreclosure moratorium law that Gov. Arnold Schwarzenegger signed last week.

Lieu said he would meet next week with administration officials to discuss his proposed changes.

The Obama plan, announced Wednesday, enables government-backed mortgage companies Fannie Mae and Freddie Mac to back mortgages for people who have less equity in their homes than would traditionally be required, thus allowing them to take advantage of historically low interest rates.

Under the plan, people who are current on Fannie Mae and Freddie Mac mortgages for their principal homes could obtain less expensive loans guaranteed by the quasi-government companies for as much as 105% of the property value.

A person whose house was worth $400,000, for example, could get a loan for $420,000.

But 46% of Riverside County mortgage holders owe more than 105% of their homes’ value.

In San Bernardino and San Diego counties, more than 30% exceed that limit. And in Los Angeles County, 29% owe too much to be eligible for the plan, according to researchers at a Columbia University business school real estate studies center. Columbia University real estate professor Christopher Mayer, who has argued for a government refinancing of all Fannie Mae and Freddie Mac loans to lower interest rates, said it is “unfortunate” that the limit is so low for what is technically known as the loan-to-value ratio on the homes.

“The 105 loan-to-value limit will really constrain the program in California, and is also unnecessary,” Mayer said.


Obama administration officials said the limit was imposed by the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.

They said people who can’t be helped by refinancing but are under stress because their income has fallen or their interest rates have gone up can seek assistance under a second part of the anti-foreclosure program that encourages loan modifications.

That part of the plan provides taxpayer-funded financial incentives for mortgage companies to modify loans, using a series of actions similar to those used by the Federal Deposit Insurance Corp. to help distressed borrowers at Pasadena’s failed IndyMac Bank.

The goal is to lower the payment to 31% of the borrower’s income, first by reducing the interest rate to as low as 2%, then by extending the repayment period to 40 years, and then by allowing the borrower to skip interest payments on part of the principal amount of the loan. As a final step, lenders and loan investors could actually forgive a portion of the debt.

Mayer and Lieu praised the modification program, although the Columbia professor said he believed it would work to the fullest extent only if loan servicers, who handle billing and collections on mortgages, are provided some legal protection against lawsuits by holders of mortgage-backed securities.

The Obama plan has no such “safe harbor” provision.

Lieu said that whatever its flaws, the Obama plan addresses a root cause of the nation’s economic woes by trying to help homeowners rather than “following the Bush administration policy of just throwing money at the banks.”


Nonetheless, he said, the refinancing limit should be raised, perhaps to 115%, to help more people obtain cheaper loans.

“Otherwise, you’re just going to end up helping a lot of people outside California,” Lieu said.