California’s Proposed Mortgage Modification Program

California Governor Arnold Schwarzenegger recently announced a legislative proposal to stem foreclosures in the state by incentivizing lenders to offer "robust" loan modification programs. Although the proposal is limited to California, it could serve as a model for similar legislation by other states and the U.S. Congress.

The proposal uses a "carrot and stick" approach. The "stick" is a mandatory 90-day moratorium on foreclosures, applicable to first lien mortgages on owner-occupied primary residences as to which a notice of default has been filed. The "carrot" is a lifting of the moratorium only if the designated state regulator issues an order exempting the servicer. The state regulator will issue an order only if the servicer provides evidence that it has implemented a "robust" modification program.