This week, Barack Obama announced the details of his plan to save up to 9 million homeowners facing foreclosure from losing their residences.  The goal is to place a floor on foreclosures and help people whose rates have reset to work out loan modifications with their lenders.  The federal legislation that passed the House which would allow bankruptcy judges to modify the terms of loans, which gives homeowners a powerful stick to force the lenders to pre-empt a cramdown from the judge, will also help this.

Unfortunately, the class of homeowners who would be left behind in this plan are those who are “underwater” on their homes; that is, they owe more on the principal of the home than the current value.  And that’s an accurate depiction of a very large segment of California homeowners.

The Obama administration’s plan to stave off foreclosures could fall flat in California, where nearly one-third of mortgage holders are underwater on their loans — many of them by amounts that would disqualify them for government-sponsored refinancing.

The problem is likely to be especially acute in areas like the Inland Empire, where homes have lost more than 40% of their value in the last year and nearly half the homeowners owe more on their loans than the properties are worth.

“They’re underwater by six figures in many cases,” said Greg McBride, a senior analyst with Bankrate.com. “Many homeowners in Southern California are left to twist in the wind.”

Under the Obama plan, people who are current on their mortgages could obtain new loans with lower rates for as much as 105% of the value of their homes. That means people could borrow $315,000 against a home worth $300,000.

The problem is that in California, many people owe far more than 105% on their homes, McBride said.

The thinking may be that stopping the worst foreclosures from occurring and lowering the overall rate will stop the dramatic slide in home prices and give those who are underwater a chance to make up the difference.  But we may not have that kind of time, as so many are drowning in debt with seemingly no hope to dig out.  In addition, the 10.1% jobless rate here (and rising in February, to be sure) will mean that a substantial number of honeowners will simply be unable to pay no matter what kind of modification can be worked out, and so the wave of foreclosures will continue.

Into this troubling situation has stepped Ted Lieu, the legislature’s point person on the housing crisis.  He is calling on the Obama Administration to do more.

“Many distressed homeowners in California are underwater by more than 5% on their home loan, which makes them ineligible to apply for refinance assistance,” said Lieu, author of a state foreclosure moratorium law that Gov. Arnold Schwarzenegger signed last week.

Lieu said he would meet next week with administration officials to discuss his proposed changes […]

Lieu said that whatever its flaws, the Obama plan addresses a root cause of the nation’s economic woes by trying to help homeowners rather than “following the Bush administration policy of just throwing money at the banks.”

Nonetheless, he said, the refinancing limit should be raised, perhaps to 115%, to help more people obtain cheaper loans.

“Otherwise, you’re just going to end up helping a lot of people outside California,” Lieu said.

It’s just hard to put a single national standard on the plan when the circumstances are wildly different depending on the region.

Let’s also note that Lieu’s own housing legislation will begin to kick in shortly.  This is from a press release:

My legislation, the California Foreclosure Prevention Act, will now compel a lender to modify a loan well before a homeowner should need to seek a solution from a bankruptcy court.  Beginning in May, California will impose a 90 day foreclosure moratorium unless a lender offers a comprehensive loan modification program based, in part, on criteria set forth by the Federal Deposit Insurance Corporation. By adding a strong disincentive if a lender refuses to modify home loans, California’s action not only compliments the President’s plan, but gives him another stick to stabilize the real estate market and this economy.

It’s worth praising those lawmakers who are taking the lead, especially on a problem of this magnitude which is such a major contributor to the overall economic meltdown in California.