California lawmakers urge 120-day foreclosure halt

By Jim Christie

SAN FRANCISCO, Nov 11 (Reuters) - California Democrats who control the state Assembly said on Tuesday they would push for a 120-day moratorium on foreclosures after mortgage default notices have been filed, compared with a 90-day stay proposed by Gov. Arnold Schwarzenegger.

The rival plans will be debated during special session of the state legislature that Schwarzenegger called last week to tackle a state budget shortfall that has widened to more than $11 billion because revenues have plunged amid recent financial market turmoil and the state's housing slump.

Some areas of California, the most populous U.S. state, are among the hardest hit in the nation by foreclosures stemming from risky mortgages such as subprime loans taken on during the state's booming homes market earlier this decade.

"Earlier this year, the legislature passed a bill that prevents lenders from initiating foreclosure proceedings until 30 days after contacting a borrower. We're here today to announce the Assembly will be throwing out another lifeline to help keep more Californians in their homes," Assembly Speaker Karen Bass told reporters.

Bass said that during the proposed 120-day period, in effect after a default notice is filed, distressed mortgage borrowers would be required to make reasonable loan payments.

"We believe it is a stronger approach than what the governor has proposed, and thereby will save more homes and homeowners -- and do more for California's economy," Bass said. "In times as tough as these, 120 days just makes more sense than 90 to resolve issues and rework loans."

The California Mortgage Bankers Association said in a statement it is waiting to see details of the Assembly Democrats' plan.

"If it is across the board with no criteria, then this is a dangerous precedent that will only serve to further restrict liquidity and hinder banks even further, especially for those consumers who have chosen to walk away," the group said.

MORTGAGE 'SUITABILITY' SOUGHT

Lenders would be able to avoid having Schwarzenegger's planned 90-day stay imposed on faltering mortgages if they prove they have a robust loan modification program.

Both state and federally regulated lenders operating in California would be affected by Schwarzenegger's plan. He also wants lawmakers to let California enforce federal laws and regulations to discipline real estate licensees.

Additionally, Schwarzenegger wants lending practices changed to protect borrowers by expanding fiduciary duties for mortgage brokers so a loan suits a borrower's circumstances and by penalizing lenders who make false or misleading statements, and he would increase and standardize licensing requirements for loan originators.

The plan by California lawmakers came as the regulator for the two largest U.S. mortgage finance companies on Tuesday unveiled a plan to cut monthly payments for struggling homeowners.

Those facing foreclosure and who are spending more than 38 percent of their income on mortgage payments could have monthly payments reduced by Fannie Mae (FNM.N)(FNM.P) and Freddie Mac (FRE.N)(FRE.P), the head of the Federal Housing Finance Agency said.

Borrowers eligible for the new program could see mortgage rates cut, the life of their loans extended or principal reduced in an effort to ease their debt burden. Only borrowers delinquent by 90 days or more would qualify for new terms.

Fannie Mae and Freddie Mac own or insure roughly half of U.S. home loans, and the move is expected to provide relief for hundreds of thousands of borrowers. (Additional reporting by Patrick Rucker in Washington; Editing by Jan Paschal)