Governor Schwarzenegger and Four Major Lenders Address Foreclosure Issue

Four representatives of the major subprime lenders in California—Countrywide, GMAC, Litton and HomeEq—met with Governor Schwarzenegger to address the rising foreclosure rate in California and the possibility of giving a break to California’s homeowners in a plan announced last Tuesday.  These four companies which collectively service more than one quarter of subprime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher in the near future.

The voluntary program is designed to stem a huge wave of foreclosures. Half a million homeowners in the state have subprime mortgages that are scheduled to jump higher within the next two years after their introductory period is over. Such loan resets, in combination with a slumping real estate market, already have led to a record number of foreclosures across California. 

While the actual details remain unclear of how long interest rates will be frozen, what has been determined is who will be the potential recipients of the companys’ agreement.  To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.

According to a San Francisco Chronicle article…”Larry Litton Jr., chief executive of Houston's Litton Loan Servicing, said his company plans to expand the initial interest-rate period for up to five years.

"That gives us an ability to go in five years later and if the market has recovered and the consumers can afford an increased payment, the payment can be increased at that time," he said.

Freezing the payment rate makes economic sense for the investors who own the mortgages as well as for the homeowners, Litton said. Studies have shown that each foreclosure costs lenders tens of thousands of dollars.

However, it is still unclear what each company will do for the individual homeowner; but the fact that there is an ongoing conversation about the matter is a positive step forward.