California’s law to suspend foreclosures for 90 days took effect yesterday. The law applies to homes used as a primary residence where the home was purchased between January 1, 2003 and January 1, 2008. The bill, introduced by state senator Ellen Corbett, D-San Leandro, was signed into law by Governor Schwarzenegger in February.

The intent of the bill was to encourage lenders to grant more mortgage modifications to distressed homeowners.

Unfortunately, the law has little teeth. A lender can apply for an exemption from the law if it has a loan modification program in place that meets fairly soft criteria – lowering interest rates for 5 years, extending the term of the home loan, or deferring some of the principal. The programs must target the homeowner’s monthly mortgage payment at 38% of the borrower’s gross income.

What This Means to You, Dear Homeowner

Despite all the fanfare from politicians — not much since virtually all lenders will qualify for an exemption from the law.

All a lender has to do is file paperwork with state regulators saying it has a loan modification program. This doesn’t mean that the lender actually has to modify home loans. It just has to have a “plan,” which is kind of like when my kids say they plan to clean up their rooms. With kids, you can at least give them a time out if they don’t follow through. With lenders, the state government has no oversight or enforcement.

Moreover, the target of 38% is a big step in the wrong direction given that the Federal Homeowner Affordability Plan targets 31%.

Nice try, California Legislature and Governor Schwarzenegger. I guess you’ll be too busy raising taxes and cutting services to fill the massive $23 billion hole in your own budget “plan” to worry about whether or not lenders follow their loan modification plans.