Arnold Schwarzenegger is once again leading US states to action on policy reform ahead of lawmakers on Capitol Hill. The California governor, who this year introduced significant environmental and healthcare reforms, has now moved to slow the rate of home loan defaults brought on by the collapse in the sub-prime mortgage market reports the Financial Times.

 

Mr. Schwarzenegger’s deal with four of the state’s biggest mortgage lenders – Countrywide Financial, GMAC, Litton and HomeEq – is “nothing less than jaw-dropping in its ambition and implications”, according to Matt Fellowes, a fellow with the Brookings Institution.

 

Under the scheme, the four lenders will extend for a “sustainable” period their low introductory rates on adjustable sub-prime loans to homeowners at risk of foreclosure.

 

That would address a serious headache for policymakers – the large number of adjustable-rate home loans taken out at low introductory rates and due to reset at higher rates in the next few years.

 

Adjustable rate mortgages (ARMs) make up about 30 per cent of all US home loans and are more prevalent in the low-quality sub-prime market. More than $350bn in ARMS will reset to higher rates in the next 18 months.

 

Analysts and ratings agencies alike say these resets will increase the frequency of loan defaults as falling house prices leave borrowers with negative equity and no chance of refinancing.

 

Read it here: California Homes deal to avert Defaults