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California brokers deal with mortgage lenders

State brokered a deal with four major loan servicing companies to aid homeowners on brink of default by extending low, introductory interest rates on mortgages.
/ Source: The Associated Press

California brokered a deal with four major loan servicing companies that would aid homeowners on brink of default by extending low, introductory interest rates on mortgages.

The agreement with Gov. Arnold Schwarzenegger includes Countrywide Financial Corp., GMAC Financial Services, Litton Loan Serving and HomEq Servicing.

At least one of the companies, Countrywide, had previously announced it would reach out to borrowers in danger of defaulting on payments, including modifying the terms of their loans. Countrywide, the nation's largest mortgage lender, has struggled amid rising defaults, forcing it to set aside millions to cover bad loans.

The mortgage sector has been under pressure from activists, lawmakers and consumer groups to help borrowers stave off foreclosure, particularly as adjustable-rate mortgages begin to reset, meaning much higher payments.

Mortgage servicers collect payments and deal with borrowers on behalf of lenders. Some mortgage lenders, such as Countrywide, also service home loans originated by other lenders.

Under Tuesday's agreement, announced by Schwarzenegger, borrowers facing an interest rate reset would be eligible to have their rate frozen temporarily if they are current on payments.

The deal follows suggestions by the Federal Deposit Insurance Corp. that lenders allow subprime mortgage borrowers to pay initial interest rates if they are living in the home and are making payments, but will not be able to afford a higher rate.

The companies involved in the California deal also said they would streamline their process for determining which borrowers are likely to have trouble making payments.

The companies, which service more than a quarter of all subprime loans, or loans made to people with shaky credit, also will report loan modifications and other data to the state.

"With this type of cooperation from loan servicers, we can save tens of thousands of people from being added to the foreclosure lists," Schwarzenegger said in a statement.

The state plans a series public service announcements promoting the agreement.

Last month, Schwarzenegger signed a bill that requires lenders to clearly disclose the risks in the loans they make and evaluate borrowers' ability to pay, based on the long-term cost of the mortgage, not just the introductory rate.

Defaults and foreclosures, particularly among borrowers with subprime loans, have soared this year as the housing market in much of the country went from boom to bust.

The fallout has been most pronounced in California, where speculators seeking to buy and flip houses for quick profits contributed to soaring prices. In the third quarter, the state led the nation in the number of foreclosure filings, according to Irvine-based research firm RealtyTrac Inc.

Some 500,000 Californians have loans that will jump to higher rates in the next two years, according to the governor's office.

Tightening lending standards over the past few months have contributed to a sharp drop in home sales in California. Sales in October were down nearly 41 percent from a year ago to their lowest level in two decades.