The foreclosure crisis continues to plague California homeowners who are trapped in mortgages with exploding monthly payments. While the economy is beginning to improve, homeowners desperate to save their homes have seen little relief. And analysts predict that foreclosures will continue to worsen, particularly as Pay Option ARMs begin to recast.
Economists estimate that about one million Pay Option ARMs will reset in the next four years, resulting in massive payment shock and dramatically worsening the foreclosure crisis. California, with 58 per cent of all Pay Option ARMs originated between 2004 and 2008, will be the epicenter of this crisis. Systemic plans to modify these loans as they recast must be in place, in order to preserve home ownership and avoid a prolonged and painful recession.
Loan modifications can help many of these borrowers save their homes. To be successful, however, current loan modification programs must expand. The Administration’s Home Affordable Modification Program (HAMP) has been slow to get off the ground and will not benefit thousands of Californians threatened by foreclosure, as it does not allow for principal reduction. Yet principal reduction is exactly what borrowers need. Borrowers living in areas with sharp depreciation in housing prices do not have enough equity in their homes to qualify for HAMP. This situation is even more dire for borrowers with Pay Option ARMs, who now owe more on their homes than when they first took out their mortgages.
Poor customer service often is a significant obstacle to effective loan modifications. Homeowners seeking loan modifications continually complain that their lenders and servicers fail to respond to their phone calls; that they are asked to resubmit the same paperwork over and over again; that they are told they will not be considered for a modification unless they are already in default; and that they receive no answer to their request for a loan modification and are left with no option but to short sell their home, go through foreclosure, or file for bankruptcy. Effective customer service systems must be in place to address the next wave of mortgage resets.
The foreclosure crisis and the expected deluge of Pay Option ARM recasts require advance planning on the part of the entire mortgage industry. Given the importance of this issue, we ask that you provide the following information by no later than November 23, 2009:
1. The number of Pay Option ARM loans secured by residential real property
located in California that you are servicing (regardless of whether you own the loans).
2. Of the number of Pay Option ARM loans identified above, the number that have negatively amortized, and the average dollar amount of that negative amortization.
3. A detailed explanation of all efforts you have taken to handle customer service concerns of borrowers with Pay Option ARM loans, including any increased staffing and a description of any notices you send or are planning to send to borrowers whose loans are about to reset. For advance notices sent to borrowers, please specify how far in advance of the reset date you send, or plan to send, those notices.
4. A detailed explanation of the loan modification plans you have developed for Pay Option ARM loans. Please state the circumstances under which your plans allow for the reduction of principal, and the possible amounts of principal reduction. If you are not willing to consider principal reduction as part of your plan, please explain why. Please also specify whether you have already implemented your modification plans for Pay Option ARMs or, if not, the time frame within which you expect to do so.
5. To the extent your approach for considering whether and how to modify Pay Option ARM loans has changed since the beginning of the foreclosure crisis, please explain the changes and the reasons for those changes.
We look forward to receiving the requested information and to productive discussions on how to minimize the impact of Pay Option ARM recasts on California’s residents and economy.
Sincerely,
BENJAMIN DIEHL
Deputy Attorney General
For EDMUND G. BROWN JR.
Attorney General
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