First . . . I think that California wants to pay off everyone's back rent!
After that terrible idea, landlords will likely be able to rework mortgages because the banks do NOT want the properties. The same goes for homeowners who have fallen behind. Yes, some MAY bail at high prices but for rentals, it's difficult to find investors because they know they are buying at the top of the market. For homeowners, they are going to need to live somewhere. If you sell at the top, you're buying at the top. Many may move to rentals to wait out the bubble but this will drive rents up.
Banks do not want to be in the RE business. It almost always results in a loss for them.