A bill requiring lenders to delay foreclosure until homeowners are fully considered for a loan modification was rejected in the state Assembly on August 30, 2010.
Many delinquent homeowners have fallen victim to a trustee’s foreclosure sale while they are in the process of negotiating a loan modification with the foreclosing lender. Senate Bill 1275, if it had passed, would have given homeowners the right to sue a lender who completed foreclosure before negotiations were considered.
Data gathered by the state shows that one in ten California homeowners is 60 or more days delinquent on their mortgage — roughly 700,000 homeowners. 35% — roughly 2,500,000 — California homeowners are upside-down.
While the federal mortgage protection regulations prevent participating lenders from foreclosing on homeowners negotiating a modification, the rule is voluntary and thus unenforceable. Lenders argued the legislation would unfairly delay foreclosure for those homeowners who do not qualify for a loan modification.
first tuesday take: At first tuesday we rarely address the gossip of Sacramento bill creation and the political legislative process; only the results of bills passed. However, with this bill rejection, the real estate recovery was dealt a major setback. Even if the regulation would have reduced fees for brokers and agents (due to modification which keeps the property off the market), brokers and agents should have been all over this one to help right the real estate market, keep owners in their homes and prevent lender deception by stalling on loan modification consideration when proceeding to a trustee’s sale.
Sacramento was blinded by the political donor weight of big banks when they rejected a bill that would have held lenders accountable for inefficient processing time and lack of organization. Lenders lull homeowners into the belief that modification is possible when a foreclosure sale was their underlying goal all along.
Once again, lenders show distaste for any challenge to their authority — regardless of how rational the bill’s regulations would have been. Despite having the largest share of the blame for the crisis on their shoulders, lenders remain unwilling to do their part to help fix it with modification programs that are realistic (i.e. principal balance reductions to a loan-to-value (LTV) ratio of 94% of the home’s value). Also, the “too big to fail” mentality protects them, and leaves them unregulated.
The bottom line? Lenders make modification decisions based on which course of action will produce the greatest net present value (NPV), or worth in “today’s” dollars. The formula is simple. Determining who does or does not qualify for a modification based on this NPV or the alternative of short sale, foreclosure or deed in lieu does not require months of stringing along a homeowner in distress. They just need to consider it with the homeowner as though in mediation of a dispute. Harmless stuff by any standard.
Brokers, agents and the public must continue to put pressure on lenders to ramp up their cooperation and participation in this recovery since they will never do so on their own recognizance. They much prefer the response taken by Japan and Mexico in their 1990s financial crises.
Re: “Assembly rejects foreclosure/modification bill” from the San Francisco Chronicle