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California Pushes Write-Downs Under Obama Program

By Alan Zibel

California is revamping its efforts to aid homeowners who owe more on their mortgages than their homes are worth.

The California program was launched as part of an Obama administration push to let states work out their own responses to the foreclosure crisis. California, Nevada and Arizona — states with steep home-price declines — chose to aid “underwater” homeowners.

But the states had trouble getting going after mortgage-finance giants Fannie Mae and Freddie Mac refused to allow loan write-downs and much of the lending industry (with the notable exception of Bank of America) declined to participate. Loan write-downs involve eliminating a portion of the amount outstanding.

As a result, California risked not spending the $2 billion it has been allocated under the federal program. So the state on Monday announced a revamp of the program.

Effective next month, California has eliminated a requirement that mortgage-servicing firms provide a 100% match of federal funds. The program will now fund up to $100,000 in principal write-downs, with no match required. The money will be provided in the first year rather than in three installments.

“We are making these changes to encourage more (mortgage) servicers to participate,” in the principal reduction program, said Claudia Cappio, executive director of the California Housing Finance Agency in a press release. “Unfortunately, we had limited participation among servicers with the existing program and thousands of homeowners could not qualify for assistance.”

As a result of the changes, Ms. Cappio said “the major obstacles to servicer participation have been cleared.”

Since the revamped California program does not require investors in mortgages to take losses, Fannie and Freddie could now participate. The government-controlled mortgage companies “will work with (California) to apply its new program” to their loans, said a spokeswoman for the Federal Housing Finance Agency, which regulates Fannie and Freddie.

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