Gov. Arnold Schwarzenegger has signed into law a 90-day moratorium on California home foreclosures as a trailer to the recently approved state budget, but a loophole that’s built into the legislation would, in effect, negate the moratorium’s purpose — to slow home foreclosures in the state, according to the San Francisco Chronicle (“State Foreclosures Moratorium Has Wide Loopholes,” Feb. 24, 2009).

Consumer advocates are concerned that the moratorium, which applies to owner-occupied homes whose mortgages were taken out between Jan. 1, 2003 and Jan. 1, 2008, doesn’t apply to all lenders. Under the law, some loan servicers may still foreclose on properties as long as they have a mortgage loan modification program in place that allows homeowners to:

• Defer a portion of their mortgage’s principal balance
• Lower the interest rate on their loan for at least five years
• Extend the terms of their home loan

But Kevin Stein, associate director of the California Reinvestment Coalition, said there’s a difference between lenders having a loan modification program in place and lenders actually granting loan workouts — a distinction the law fails to address.

Currently, lenders could be exempt from the moratorium, if their mortgage loan modification program is aimed at reducing a homeowner’s monthly mortgage payments to 38 percent of their gross income — a more lenient restriction than the one imposed by the Obama administration’s Homeowner Affordability and Stability Plan, which attempts to lower a homeowner’s mortgage payments to 31 percent of their gross income.

“It was a step backward from where things were going from an industry standpoint and a federal standpoint,” Stein said.

Sen. Ellen Corbett, who drafted the bill, said the legislation’s limitations were a result of strict federal banking regulations. In a letter of opposition, the California Bankers Association, California Mortgage Bankers Association, and other financial trade groups said the legislation’s shortfalls “will create uncertainty, delay economic recovery, and stifle home sales.”

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