A 90-day moratorium on foreclosures in California was put into effect on June 15, 2009.

It covers loans on owner-occupied principal residences made between January 1, 2003 through January 1, 2008. However, a lender is exempt from the moratorium if they have some sort of loan modification program which, at the very least, includes an adjustment in monthly mortgage payments to somewhere close to 38% of a borrower’s income.

The modification program doesn’t even have to hit this target debt-to-income ratio. Further, the lender doesn’t even have to actually grant a loan workout to a borrower in order to be exempt from the foreclosure moratorium.

Investor-owned loans are also exempt from the foreclosure moratorium if the servicing contract with the lender states foreclosure is preferable to modification.

first tuesday take: Who then is left to “benefit” from this moratorium? Little to no one.

Sacramento would like you to believe that it cares about the people drowning in debt on the cul-de-sac. However, this American-dream moratorium is merely a patriotic band-aid on a gaping financial wound inclusive of around 1,100,000 California foreclosures during this financial crisis. Actually, it hurts much more than it helps.

Not allowing foreclosures which must inevitably be completed simply slows the arrival of the day the real estate market will recover and we can all settle down and become unstressed buyers and sellers. Moratoriums prolong the self-correction process between over-encumbered owners and under-secured lenders that is so desperately needed to stabilize sales and rentals. California still has some 650,000 plus foreclosures to be completed to clear the housing market of negative equities produced by “dead-end” mortgages—unless, as an alternative, federal law soon allows bankruptcy judges to cram down loans to match property values.

Sacramento has compounded a bad situation by making it worse, but could redeem itself by recommending that Congress authorize judges to put an end to these foreclosures by reducing both the loan amount and payment schedule; then again that is something the lenders will not let happen—a case of the regulated regulating the regulators. Thirty years of shifting wealth away from property owners under supply-side Reaganomics is not quickly cured.

Re: “California’s 90-day foreclosure moratorium starts, sort of” from The Orange County Register