California plan to stem foreclosures has critics; bail out for banks, not owners

July 14, 2010
California plan to stem foreclosures has critics
By Jim Wasserman - Sacramento Bee

A $700 million state plan to prevent 40,000 California foreclosures came under fire Tuesday from activists who called it another bailout for the nation's largest banks.

The charges, made at a Capitol news conference, and later to leaders of the state's affordable housing bank, marked fresh tensions over a loan crisis still stubbornly resistant to government solutions.

Representatives of statewide unions, churches and community groups said new state plans to partially pay off mortgages of struggling homeowners will largely subsidize bank losses and leave owners still owing too much to avoid foreclosure. Groups including the Service Employees International Union and One LA-Industrial Areas Foundation want banks to absorb more losses in trimming mortgages to today's lower market values. The financial practice, widely resisted by lenders, is called principal reduction.

"Our concern is this plan provides far too much funding to investors and banks in return for mortgages to be reduced," said Yvonne Mariajimenez, a One LA-IAF representative addressing directors of the California Housing Finance Agency on Tuesday.

CalHFA, launching the nation's biggest principal reduction program on Nov. 1, will spend $420 million to trim mortgages by up to $50,000 each. Lenders are being asked to match the state's contribution, jointly cutting mortgages to a level where owners aren't tempted to walk away.

No one knows how banks will respond, though CalHFA staff described "positive" meetings with them. But even a CalHFA board member, Paul Hudson, chairman and chief executive officer of Broadway Federal Bank in Los Angeles, expressed doubts that lenders would step up to CalHFA's requests.

"I'm not even sure banks are committed to 50-50," he said.

Responding to critics Tuesday, CalHFA defended its 50-50 formula as a best hope to lure participating lenders. "Our goal is to push them as far as possible. But if we we offer them 6 cents on the dollar and no lender participates, no borrower gets helped," said CalHFA project manager Diane Richardson.

CalHFA's new "Keep Your Home" initiative is part of a U.S. effort to slow foreclosures in states hardest hit by the housing meltdown. The U.S. Treasury Department allocated $1.5 billion for new trials in California, Arizona, Nevada, Florida and Michigan. Yet fierce divides abound about how to negotiate solutions that involve banks, homeowners and taxpayer money.

CalHFA officials held firm Tuesday, rebuffing calls to change plans that haven't been tried yet. Richardson directed critics to send their suggestions to the agency for possible funding out of $32 million set aside for alternative ideas.

Generally, Sacramento-area couples earning $70,000 or less, or singles earning $61,000 or less, are eligible. But help is largely for homeowners struggling with loans they used to buy their homes, rather than those who refinanced.

Activists Tuesday called the policy unfair to thousands who did cash-out refinances during the housing boom. They argued that many people were solicited by predatory mortgage brokers and lenders harvesting lucrative fees. Others said refinancing paid off credit cards, further strengthening financial institutions. Still others cited refinances for tuition and medical debt.

But CalHFA's Richardson said the agency felt it had to draw a line. She said, "We didn't feel we could decide who cashed out for a good reason and who didn't."