Entering the new year, California continues to be the blue lagoon for the mortgage mess. It is one of five states leading the nation in “underwater” mortgages, where the value of a home is less than what the homeowner owes on the mortgage. That situation extends the housing meltdown to homeowners with good credit.

As 2010 begins, the governor and lawmakers have an opportunity to make a new start, ensuring that California leads the nation in getting homeowners above water. While federal measures can help, they do not fully address California’s situation or those in the same leaky submarine — Nevada, Arizona, Florida, Michigan. Those states will have to forge solutions.

Thirty-five percent of California mortgages are under water, according to First American CoreLogic. In the Sacramento metro area, it is 44 percent. For its own self interest, California in 2010 should vow to be a national leader in dealing with this issue.

Law professor Brent T. White, in an important new paper, “Under Water and Not Walking Away,” describes the problem: A young professional couple with excellent credit and a solid income bought an average three-bedroom house in Salinas for $585,000 in 2006. Their monthly payment is $4,300. Then the housing bubble burst and their house now is worth only $187,000 — though they still owe $560,000 on their mortgage. He estimates it would take them more than 60 years just to recover their equity.

The problem for them — and 2.4 million of 6.9 million California mortgage holders (the most in the nation) — is that lenders failed to ensure that homes were actually worth what they sold for. Lenders in the appraisal process simply ignored bubble prices if the borrower seemed able to make monthly payments.

So what can underwater homeowners do? In White’s example, the couple could continue to pay $4,300 a month. Or they could go into foreclosure, rent a place for $1,000 a month, and in a few years buy a home selling at a pre-bubble price of $180,000 with monthly payments of $1,200. Or they could approach their lender/loan servicer and attempt to get a loan modification that reflects the home’s real value, voluntarily writing down some of the principal.

The latter is the best solution for everybody. The problem is, such loan modifications just aren’t happening.

The much-heralded California Foreclosure Prevention Act signed by the governor in February was supposed to require a 90-day moratorium on foreclosure and encourage modifications by exempting lenders who had a “comprehensive loan modification program in place.” What has that act actually accomplished? Very little. The entire nation has seen only 32,000 loan modifications.

And none of the bills signed by the governor last October, taking effect this year, addresses this issue.

California policymakers can do something very simple when they come back this week: Require lenders/servicers to evaluate borrowers for alternatives to foreclosure, such as loan modification, before filing notices of default.

That would require lawmakers to stand up to lenders that are a powerful force in the Capitol, but they must do so. If California doesn’t take matters into its own hands, the still-sinking housing market will remain submerged. 

Editorials are the opinion of the Merced Sun-Star editorial board. Members of the editorial board include Interim Publisher Debra Kuykendall, Executive Editor Mike Tharp, Editorial Page Editor Keith Jones, Copy Desk Chief Jesse Chenault and Online Editor Brandon Bowers.

http://www.mercedsunstar.com/181/story/1255878.html