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I’ve read that California Governor Schwarzenegger and President Elect Obama want to have a 90 day moratorium on foreclosures. You can hear Arnold’s reasoning here.

http://www.npr.org/templates/story/story.php?storyId=96753445

At face value, that sounds like it could be a good idea. The thought would be that a moratorium would allow the market to stabilize in hard hit areas, home owners would have more time to work out loan modifications and private sellers would get a needed break in competing with bank owned properties.

On the other hand, this could have a devastating effect on the market as well. What makes Obama think that most home owners want or could qualify for loan modifications? Here are the problems I see;

1. Many owners are frustrated that their property values have fallen so much. They resent the fact that the new neighbor who just bought next door is paying half the property taxes they are.

1. Many owners feel they will need to hold on to the property for a very long time in order for it to rise enough in value to create positive equity.

1. Loan modifications will only be allowed if homeowners didn’t commit fraud and “pad” their stated income. The majority of people who purchased a home with an adjustable rate mortgage over a half million dollars certainly did that.

1. Distrust of the banks. Many minorities were put in loans that they didn’t need to, with adjustable rates and long pre-payment penalties. They don’t believe that the bank will suddenly become honest and helpful.

1. What good would a loan modification do if the homeowner gets behind on their property taxes? When homeowners decide to walk away from a property, they usually stop payiing everything. Unless the bank is going to pay the taxes current, most properties late in the foreclosure process are not going to be redeemable.

The big question I would have is, what happens after 90 days? A flood of foreclosures? The banks and investors certainly shoulder much of the blame for this situation, but what about homeowners who used their house like an ATM? They helped themselves to equity cash, bought that big beautiful Tahoe and loaded up all their appliances on the way out the door. Do they deserve 90 more days of free rent?