The law concerning foreclosures in California is set to change on January 1, 2012. Many are concerned this will complicate the foreclosure process and grind the foreclosure machinery to a halt. So far the banks have taken little notice. Some speculated there would be a last-minute push to get foreclosures done before the change took effect. That isn’t happening. The banks are in no hurry to process their backlog of foreclosures, and if the changes in the law complicate the process for them, they will grin and bear it.
By Kerri Ann Panchuk — October 5, 2012 • 8:42am
The Homeowner Bill of Rights launched in California not only changed hundreds of years of real estate law, it may have turned the West Coast state into a judicial foreclosure state with financial firms on high alert, legal experts claim.
“In California, they just gave trial lawyers a nuclear weapon to use against the industry,” said Bob Jackson, president and attorney at Irvine, Calif.-based Jackson & Associates. Jackson spoke at HousingWire’s REperform Summit, a mortgage servicing conference under way in Dallas.
“The Homeowner Bill of Rights is the most massive change in the last 100 years of real estate law,” he said. “It used to be servicers were in the business of enforcing simple contract law. What the loan servicer did is they enforced the contract, but that is no longer how the game is played.”
Servicers are still in the game of enforcing contracts. The recent changes spell out a new series of procedures they must follow in order to do their jobs, and it provides penalties if they do it poorly. The most likely result will be higher documentation standards for new loans and increased costs for loans that will get passed on to consumers.
The bill of rights, which was legislation designed by California Attorney General Kamala Harris, gave borrowers standing to legally address violations of the new foreclosure legislation.
The law bans dual-track foreclosures, requires single point of contacts for distressed borrowers and imposes civil penalties for the filing of multiple unverified documents, otherwise known as robo-signing. The robo-signing provision essentially means a law firm cannot file a notice of default or another foreclosure-related action unless a servicer has reviewed the filings to verify them, Jackson said.
The review requirement will ensure paperwork is in order from now on. This is not a bad development, unless you like shoddy paperwork.
Jackson said the bill created several new areas of concern for servicing shops. The first is the potential to be sued for wrongful denial of a loan modification. Firms also can be sued if a loan modification was denied because of a mistake made in the process.
With any document misstep leading to the possibility of litigation, Jackson said the hedging strategy would be to file judicial foreclosures, bypassing the common practice of nonjudicial foreclosures in California.
The lenders and servicers will put procedures in place to minimize their exposure, and then they will go back to business as usual. The savings in time and money over a judicial foreclosure will pay for a lot of new procedures and paperwork. The whole point of a non-judicial foreclosure process was to avoid clogging the courts with these proceedings and reduce costs. One look at the mess in Florida reveals the wisdom of the non-judicial foreclosure process.
“You need to start looking at your foreclosure timelines,” Jackson said. “Judicial foreclosures get rid of 80% to 90% of this stuff.” He asserted, “[T]he bill will turn California from a nonjudicial foreclosure state to a foreclosure state.”
Jackson noted that Arizona and Oregon are currently considering similar legislation.
I think these concerns are overblown. If servicers can’t put procedures in place to comply with the new law, then judicial foreclosures will be far more common, but someone, somewhere will find a less expensive non-judicial procedure to save money on the foreclosure process.
One side effect of this will be ongoing delays in foreclosure processing, but lenders don’t seem to mind that. They are taking their write downs as they can afford them, and with a near zero cost of capital, they can afford to wait.
A detailed review of the new changes
Back in July I wote a detailed review of the new changes to California foreclosure law.
The California legislature passed the so-called Homeowners’ Bill of Rights, and Jerry Brown has indicated he will sign it into law. So how does this new law change the foreclosure process? Let’s take a closer look.
Marisa Lagos and Wyatt Buchanan — Updated 11:33 p.m., Monday, July 2, 2012
What the legislation does:
Delays: Bans banks from proceeding with a foreclosure when a homeowner is seeking a loan modification, a practice known as dual tracking.
Dual tracking has always been part of the foreclosure process. Foreclosure is supposed to be a threat to compel a borrower to either pay up or sell and move out. Foreclosure is a threat designed to compel action. Banks use the threat of foreclosure to ensure borrowers are dealing with them in good faith. If a lender senses the borrower is not cooperating, they pull the trigger on the foreclosure to boot them out.
This provision came about because some borrowers were frustrated when they were negotiating with one division at the bank, and another foreclosed on them. There were instances where the left hand didn’t know what the right hand was doing. Was this widespread? Probably not, but many people who were denied short sales, often without explanations for the denial, were foreclosed on, and they felt the process needed clearer procedures. Perhaps they are right.
The details on how this is implemented matters. If the lender cannot begin the process while a borrower is applying for a loan modification, then after the loan modification is denied, each borrower gets four months of free rent while the lender waits the statutory timeframe. However, if the lender must simply halt the process, then very little has changed.
There is only a three week period between the Notice of Trustee Sale and the actual auction. If the lender has filed a NOD, something they will now be strongly encouraged to do in order to start the process, then they can process a loan modification request during the 90-day redemption period, which is what that period is intended for (loan modification is another form of curing).
If this change prevents the lender from taking the next step rather than the first step, then this law will have a positive impact. One thing it will likely do is streamline the loan modification process. When lenders finally want to stop amend-extend-pretend, they will want to process foreclosures in a timely manner, which means processing a loan modification request in 90 days.
This law will also require some clarification on the loan modification process. Is there a timeframe for borrower compliance? If not, this is ripe for abuse. What happens when the borrower is tardy with providing necessary documents? Is that an automatic denial? Does the borrower have the right to appeal a “no” answer? If so, what are the timeframes, and what is the process. If these items are not spelled out, attorneys will use these ambiguities to tie up lenders in loan modification requests for months to help their clients get more free housing.
Contacts: Requires banks to provide struggling borrowers with a single point of contact at the bank.
This is a good idea. This should eliminate most of the intra-bank communication problems. Borrowers should know who to call who can give them answers.
Answers: Requires banks to clearly explain to borrowers why they are rejected for a loan modification.
This is another good idea. Of course, borrowers may not like the answer they are given, but that leads back to the questions I posed above about the loan modification process. Once a borrower gets a “clear no” what can they do about it? Anything? Attorneys will take advantage of this part of the process.
Recourse: Gives borrowers the right to sue lenders for “significant, material violations” of the law.
This is another provision the attorneys are going to love as “significant, material violations” of the law is defined. If this provision has real teeth, like the law in Nevada, it could really put a damper on foreclosures and enshrine squatting for many in shadow inventory.
Fines: Subjects lenders to fines of $7,500 per loan for filing and recording unverified documents.
This is similar to the Nevada law. If the paperwork in California is truly shoddy, this will halt many foreclosures and give free houses to loan owner who don’t deserve them.
Limits: Applies to first-lien mortgages for owner-occupants.
At some point, I expect to see this broadened to cover seconds and HELOCs. Right now, those mortgages are unlikely to foreclose because they are underwater and have no value, but if prices do rise, these subordinate lien holders will play havoc on delinquent borrowers unless the banks create universal procedures for both first and second mortgages.
I don’t think California will become a judicial foreclosure state. The cost of private lending will go up here, and lenders will pass those additional costs on to borrowers. The people intent on gaming the system will have a few new cards to play, and the rest of us will end up paying the price for their bad behavior.
Doubling mortgage debt in just five years
People do really stupid things with their finances. When someone doubles their mortgage debt in just five years, you have to wonder what they were thinking. Did their income double? How were they going to pay that off? Was the house going to pay it for them?
- The former owner of today’s featured REO was a typical Ponzi who spent her house. She paid $440,000 on 4/11/2002 using a $300,700 first mortgage, a $60,000 second mortgage, and a $80,000 down payment. She also had a $60,000 HELOC approved when she bought which may have been used for purchase money.
- On 3/10/2003 she refinanced with a $322,000 first mortgage.
- On 6/27/2004 she obtained a $100,000 HELOC.
- On 3/25/2004 she refinanced with a $480,000 Option ARM.
- On 6/7/2007 she refinanced with a $640,000 first mortgage.
- On 6/7/2007 she opened a $80,000 HELOC.
- Total property debt was $720,000 assuming she maxed out the HELOC. Total mortgage equity withdrawal was $360,000. She doubled her mortgage debt in five years.
If the housing bubble inflated further, do you think she would have doubled her mortgage again over the five years that followed? Since she never thought she would have to pay it back, it’s reasonable to assume she would have. All the Ponzis would have. Once they believed the house would pay off their debts, it was free money, and no Ponzi is ever going to turn down apparently free money even if it’s really debt.
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Proprietary OC Housing News home purchase analysis
$569,900 …….. Asking Price
$440,000 ………. Purchase Price
4/11/2002 ………. Purchase Date
$129,900 ………. Gross Gain (Loss)
($35,200) ………… Commissions and Costs at 8%
$94,700 ………. Net Gain (Loss)
29.5% ………. Gross Percent Change
21.5% ………. Net Percent Change
2.5% ………… Annual Appreciation
Cost of Home Ownership
$569,900 …….. Asking Price
$113,980 ………… 20% Down Conventional
3.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$455,920 …….. Mortgage
$109,674 ………. Income Requirement
$2,017 ………… Monthly Mortgage Payment
$494 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$142 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$180 ………… Homeowners Association Fees
$2,833 ………. Monthly Cash Outlays
($311) ………. Tax Savings
($733) ………. Equity Hidden in Payment
$119 ………….. Lost Income to Down Payment
$91 ………….. Maintenance and Replacement Reserves
$2,000 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,199 ………… Furnishing and Move In at 1% + $1,500
$7,199 ………… Closing Costs at 1% + $1,500
$4,559 ………… Interest Points
$113,980 ………… Down Payment
$132,937 ………. Total Cash Costs
$30,600 ………. Emergency Cash Reserves
$163,537 ………. Total Savings Needed