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California Foreclosure Prevent Act Ensures Loan Modifications
17th November 2008
The Bush administration increased its taxpayer bailout of a single Wall Street corporation, AIG, to a colossal $150billion because the initial $85 billion bailout failed. To put that into perspective, $150 billion is more than the entire budget of the state of California. We also learned the Treasury Department, in the dark of night and without apparent legal authority, secretly changed a little- known tax law in order to give a $140billion windfall to banks at the expense of taxpayers. Meanwhile, thousands of home foreclosures continued to occur and ordinary citizens continued to suffer. The last eight years provide strong evidence that trickle-down economics is intellectually bankrupt. There is little reason to believe the current administration’s trickle-down solution of showering Wall Street with vast amounts of taxpayer monies is going to fare any better. We need a solution from the ground up, one that helps not just Gordon Gecko the banker, but Joe the homeowner.
The root cause of the financial meltdown is the massive and continuing wave of home foreclosures. In California, we had 101,100 foreclosure filings in August, which equated to about one foreclosure filing every 30 seconds. Many Wall Street firms disintegrated after the mortgage assets they held became toxic and worthless because too many homeowners started defaulting on loans. If we can reduce the number of foreclosures on the ground, we will steady Wall Street, stabilize housing prices, keep families in their homes and start our economic recovery much sooner. That is why I have authored a bill designed to force Wall Street to help the struggling homeowners on California Street. The bill, known as the California Foreclosure Prevention Act, is a bottoms-up solution that builds upon a recent proposal by Gov. Arnold Schwarzenegger.
The California Foreclosure Prevention Act contains three main points. First, the bill imposes a 120-day foreclosure moratorium on home foreclosures to allow time for the homeowner and the lender to try to work out a solution. Second, a bank can avoid the foreclosure moratorium if it has a comprehensive loan modification plan based on criteria established by the Federal Deposit Insurance Corp. Part of the criteria includes modifying mortgage loans for borrowers in default so that approximately 38% of the borrower’s debt-to-income ratio goes toward paying the mortgage. Loan-modification solutions can include freezing interest rates, reducing interest rates, reducing principal or extending the term of the loan. Third, the bill provides strong oversight and accountability provisions. There will be mandated reporting to the state Legislature and consultations with executive and legislative officials. Unlike the Bush administration’s taxpayer bailouts, not a single dime of taxpayer funds will be used to modify home loans. It is Wall Street firms and banks that will be paying for the loan modifications.
The California Foreclosure Prevention Act, if enacted into law, would be the first law in the nation to provide for a foreclosure moratorium unless banks provide a program for comprehensive loan modifications. Because states have virtually sole authority over the foreclosure process, this act would apply to both state- and federally chartered institutions. The hope is that other states will replicate this model to start forcing more loan modifications to occur.
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