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.
Brown’s on board
Gov. Jerry Brown indicated he would sign the measures into law. In a released statement he said, “The Homeowner Bill of Rights will prevent banks from throwing Californians out of their homes while they are trying, in good faith, to renegotiate their mortgages. This bill establishes important consumer protections that are long overdue and I commend Attorney General Kamala Harris for her determined pursuit of these changes.”
The provision for good faith is the key. Many borrowers will not negotiate in good faith. They will get attorneys to help them game the system for as long as humanly possible.
But Assemblywoman Diane Harkey, R-Dana Point (Orange County), and several other Republicans warned that if the bills passed, the “only people who will make money is attorneys.” She said the average foreclosure takes 352 days, which is “plenty of time,” for a homeowner to prepare.
She is right on both counts. The attorneys will find plenty of new business here, and with as long as the foreclosure process already takes, the idea that loan owners didn’t have time to resolve the situation is laughable.
“California is going to prevent our economy from being stimulated,” she said. “We are putting our fingers in the dike here, California communities are starting to bounce back, and the longer you delay recovery from the housing market, the longer property tax revenues will continue to decline. …”
Help for a loanowner
Pamela Hall, who has been struggling to keep her San Leandro condo for more than two years, said the measures “would have helped me and so many other people,” if it had passed earlier.
There is no help for the hopeless.
She and her husband – who is working two jobs – fell behind on payments when their adjustable-rate mortgage payment skyrocketed, almost quadrupling to $6,700 at one point. They owe $523,000 on a three-bedroom unit now worth about $250,000 and have stopped making mortgage payments altogether.
Why do they want to pay $523,000 for their $250,000 house? That’s what they would be doing if they managed to get a loan modification. If they walk from this house and repurchase in a few years, they could buy a similar house for about $250,000. They are paying a lot of extra money for their attachment to this house.
She has unsuccessfully asked Bank of American for a loan modification seven or eight times, said Hall, who was laid off from her office administrator job last year.
Another part of the loan modification process that needs to be defined is how many times you can apply. It should be once and done, perhaps with one appeal if there is new information. If people are allowed to apply seven or eight times, they will, and in doing so, they will game the system for more free housing.
“I’ve probably talked to about 40 people,” she said. “The story would always be: the paperwork is missing, we missed the deadline, we made too much money, we didn’t make enough money, we should get a renter – you name it.”
Let’s be real. This woman bought a house she couldn’t afford with an Option ARM (its the only thing that explains the dramatic payment shock). She probably couldn’t afford to amortize the principal over 30 years at zero percent interest. No amount of loan modification short of significant principal reduction will help her. Do we want to give people who bought homes they couldn’t afford such a break? I don’t think so.
As I wrote this post and thought more about this law, I see it has potential to improve the process if it isn’t abused. As with any new change, the devil is in the details, and there is still much we don’t know about how this law will be applied going forward. I expect to see lenders increase their foreclosure filings in 2012 in response to the January 1, 2013 deadline, but so much of what the banks have done has defied logic, that anything could happen.
Is more than three years enough time to process a loan modification?
If the first NOD was filed in May of 2009, the borrower was likely delinquent at least three months by then, so it’s reasonable to assume this guy stopped making payments in 2008 or early 2009 at the latest. The Notice of Rescission is at least one failed loan modification. In all likelihood the delays were by the banks, but if this borrower wanted to game the system, he probably could have squatted even longer.
- This borrower paid $372,500 on 6/26/2003 using a $282,500 first mortgage and a $90,000 down payment.
- On 5/12/2004 he opened a $100,000 HELOC.
- On 7/1/2005 he refinanced with a $460,000 first mortgage
- On 10/27/2007 he refinanced with a $417,000 first mortgage and a $105,000 stand-alone second.
Total property debt was $522,000, and the total mortgage equity withdrawal was $239,500 over a four year period.
Median home price is $364,000. Based on a rental parity value of $495,000, this market is under valued.
Monthly payment affordability has been improving over the last 12 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $246/SF to $248/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $8 last month from $2,045 to $2,054.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 5
$403,900 …….. Asking Price
$372,500 ………. Purchase Price
6/26/2003 ………. Purchase Date
$31,400 ………. Gross Gain (Loss)
($29,800) ………… Commissions and Costs at 8%
$1,600 ………. Net Gain (Loss)
8.4% ………. Gross Percent Change
0.4% ………. Net Percent Change
0.9% ………… Annual Appreciation
Cost of Home Ownership
$403,900 …….. Asking Price
$14,137 ………… 3.5% Down FHA Financing
3.62% …………. Mortgage Interest Rate
30 ……………… Number of Years
$389,764 …….. Mortgage
$101,940 ………. Income Requirement
$1,776 ………… Monthly Mortgage Payment
$350 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$101 ………… Homeowners Insurance at 0.3%
$406 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,633 ………. Monthly Cash Outlays
($267) ………. Tax Savings
($601) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$121 ………….. Maintenance and Replacement Reserves
$1,903 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,539 ………… Furnishing and Move In at 1% + $1,500
$5,539 ………… Closing Costs at 1% + $1,500
$3,898 ………… Interest Points
$14,137 ………… Down Payment
$29,112 ………. Total Cash Costs
$29,100 ………. Emergency Cash Reserves
$58,212 ………. Total Savings Needed
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