Under a recent plan announced by Governor Arnold Schwarzenegger, four major subprime lenders promised to freeze the initial, lower mortgage interest rates for subprime borrowers who cannot afford their escalating mortgage payments. According to Barclays research estimates, this will help about 12 percent of borrows with adjustable-rate subprime loans.

Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing—together have serviced more than 25% of California’s subprime loans, however under this voluntary agreement, the four lenders have agreed to contact borrowers before their rates adjust and establish a streamlined process for handling loan modifications. To qualify for this special program, the borrower is required to occupy the home, have made their payments on time, and prove they cannot afford payments with the higher interest rate.

The agreement states that all four loan servicers will provide this interest freeze program for a ‘sustainable’ period of time.

“Lenders could freeze rates for five years or longer, but terms will depend upon each borrower’s situation” Schwarzenegger said.

“We’ve been in like a desert of despair. There’s not been any good news, and it had not appeared the state was taking sufficient steps to intervene…This seems to be a significant step.” Said Kevin Stein, associate director of the California Reinvestment Coalition who was quoted in The Sacramento Bee. Advocates for lending policy change remain cautiously optimistic about the impact of these approaches, and note that the real impact will be driven by program design details.