A $700 million state plan to prevent 40,000 California foreclosures came under fire Tuesday from activists who called it another bailout for the nation's largest banks.

The charges, made at a Capitol news conference, and later to leaders of the state's affordable housing bank, marked fresh tensions over a loan crisis still stubbornly resistant to government solutions.

Representatives of statewide unions, churches and community groups said new state plans to partially pay off mortgages of struggling homeowners will largely subsidize bank losses and leave owners still owing too much to avoid foreclosure. Groups including the Service Employees International Union and One LA-Industrial Areas Foundation want banks to absorb more losses in trimming mortgages to today's lower market values. The financial practice, widely resisted by lenders, is called principal reduction.

"Our concern is this plan provides far too much funding to investors and banks in return for mortgages to be reduced," said Yvonne Mariajimenez, a One LA-IAF representative addressing directors of the California Housing Finance Agency on Tuesday.

CalHFA, launching the nation's biggest principal reduction program on Nov. 1, will spend $420 million to trim mortgages by up to $50,000 each. Lenders are being asked to match the state's contribution, jointly cutting mortgages to a level where owners aren't tempted to walk away.

No one knows how banks will respond, though CalHFA staff described "positive" meetings with them. But even a CalHFA board member, Paul Hudson, chairman and chief executive officer of Broadway Federal Bank in Los Angeles, expressed doubts that lenders would step up to CalHFA's requests.

"I'm not even sure banks are committed to 50-50," he said.

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