Senate Bill 94, signed by Governor Schwarzenegger on Sunday, October 11, immediately prohibits attorneys and loan modification firms from charging upfront fees to homeowners in exchange for future loan modification services. Loan modification firms will also be required to disclose that their clients can receive the same services for free via government approved nonprofit loan counselors.
Schwarzenegger also signed Assembly Bill 260 into law, forbidding special fees that encourage mortgage brokers to originate high-risk loans. This law, which goes into effect January 1, 2010, will impose a fiduciary duty upon mortgage brokers, forcing them to consider the borrower’s finances before their own profits. Negative amortization loans, which have minimum payments lower than the cost of interest, will also be forbidden.
first tuesday take: The California legislature has at last taken notice of the confusing and corrupt industry that has sprung up to take advantage of highly emotional and already troubled homeowners. For analysis of the proper place of attorneys and real estate brokers in the loan modification process, see first tuesday’s March article, “Loan modification negotiations are the domain of real estate licensees.”
The problem with loan modifications is that the only modification which is meaningful to a homeowner is one that crams down the principal on the loan to the property’s value, something that lenders are not yet willing to do. Interest adjustments and temporary payment reductions are false hopes for the person who will do anything, no matter how temporary, to stay in their home.
Loan modification services, as permitted by lenders, are nothing more than scams when the loan exceeds the secured property’s value by more than 10% or 15%. Most homes financed since 2002 are in negative equity territory well beyond 25%, or even 50% (in fact, they frequently surpass 100% in excess of present value if financed during 2005-6), and getting worse for the next year or so. The services of modification negotiations are of dubious value, since whatever services they offer are already provided for free by numerous agencies, and by lenders themselves.
Short-sale discounts will eventually become a necessity for all lenders who wish to avoid taking and reselling properties to force solvent owners to pay. When this happens, brokers negotiating a listing for a short sale property will, as an alternative to a sale, be able to concurrently negotiate a loan reduction to help the owner stay in the property. Unlike loan modification firms, brokers and their agents understand contingency fee arrangements, to be paid when the job they promised is done, and done correctly.
Re: “Loan modification firms banned from demanding upfront fees”, from the Sacramento Bee
Also see our Sacramento Gossip section for other California real estate bills passed or pending.
Great, let’s jam it to the Brokers and Salespeople Arnie and forget that the real issue here is MAKING BANKS LEND CONSUMERS THE MONEY THE FEDS GAVE THEM!
How about demanding that banks in “Cal-e-fornia” lend or get out, flex that muscle and stop over taxing us to cover your a*s! Did you forget that we’re in a depression?
PS
Tell Maria to stay off the phone when she’s behind the wheel!
I would like to follow-up to some of these comments. Personal responsibility??? What do you mean? To most of us, “personal responsibility” is taking care of ones health, family, children and finances. It does not extend to the business agreements we all make. The taking out of a loan with a lender is not a “personal responsibility”, it is a business one. When one borrows money from a lender, as part of that decision is the risk of default, for the lender and the borrower. As a borrower, one knows that the risk of non-payment on their mortgage is that they can foreclose on your home, you will have to move and your credit is impacted which may prevent you from obtaining another loan for a while. While lenders may want to escalate themselves to the same status of “personal responsibility” to taking care of ones kids, I, for one, will never buy into that nor should any other consumer. Its a business dealing, not a personal one.
The quandary is who “blinks”? Does the lender drop their balance on the loan to keep the consumer in their loan? So far they have said no. Does the neighborhoods deteriorate of these foreclosed home? Does the homeowner make payments on a substantially underwater property for the greater good of preserving our neighborhoods and keeping financial institutions healthy even though it a poor business decision for themselves. Again, its just business, that individual consumer needs to take care of their family and is not responsible to preserve neighborhoods or ensure that banks are sound.
In the end, if a property is substantially underwater, the lender has already lost on paper. For the homeowner, if they can rent the same house of $1,500.00 per month on the home they own that has a $3,000.00 per month payment, why should they be prohibited from making that business decision.
Personal responsibility, absolutely yes, you cannot emphasize it enough….but what ever happened to the principle of risk/reward. When any lender takes on a loan they are responsible for insuring that the down payment is enough to secure the repayment of the loan along with the borrower’s ability to repay or the lender will lose. My feeling is that the Treasury Department really added to our current economic crisis when they made these huge loans to the Banks without requirements as to how to use the money. A better option would have been to let those institutions fail who refuse to take responsibility for their unwise lending practices and who insist that they will not reduce the principal for these properties to a more realistic market value. Lenders have caused property values to fall deeper and extended the time to cure this mess by not doing the right thing and forgiving the unmarketable portion of these loans. We must learn from this debacle that just because Barny Frank, Chris Dodd, Chuck Shumer, etc, create legislation (with support of the administration in power at the time) to allow stupitity and greed to occur, that business people, ie the banks and insurance companies, need to step back and take responsiblity for their lending policy. If they do not, the loss should be theirs alone. In the end, it is just another lesson that we thought we learned from the Savings and Loan scandle of the 70s and 80s.
The only good thing that has developed from these huge property value losses is that homes are now much more affordable for our young families, whom I thought were priced out of ever owning a home. Again there is a but …if we don’t start making smarter financial decisions and get back to the business of creating jobs, hundreds of thousands of jobs and running good companies out of our state, we will have lost an opportunity that is truly “Once in a Lifetime”. Shame on those who do not step up to the plate.
Finally just curious, anyone think we need more government or could we do better with leaner government and smarter leadership?
This whole subject just amazes me… last I recall, the bank (lender) NEVER guaranteed the value of a home. Why is it now a correct frame of thought that the lender should write down what the borrower PROMISED to pay? In fact, the lender only made the loan because there was a promise. (Lenders do share some blame, more on that in a minute.)
I know several people / families that have decided, not because they cannot afford the payment, but because their house is worth less than the loan, to simply live for a long as they can without making the payments, wait for the lender to either modify their loan or let the bank take it. It’s all BS when that happens and it’s happening a lot. It costs all of us in the end and in many ways, eventually higher rates, lower sales prices on homes, lost jobs, you name it. Instead of commentators (like the very one that wrote the article above, and government officials condoning such behavior it should be penalized.
I admit, some people have fallen on hard times and would be well served to get some help. But, I’d venture to say that it is something less than 50% of what we are and have seen. What we are seeing is good old greed at work, the same greed that got many people to buy that could not afford too… They did it because the saw their brother, sister, aunt, etc. make $50,000 to $100,000 in a year on a home. Call it what it is GREED plain and simple.
On that same note, yes, Greed on the part of banks and secondary market investors for bad loan products. I’ve been in the mortgage business for over 25 years. And, before 2003/2004 the so called sub-prime and no income doc loans were made under appropriate circumstances. Such as large down payments, cash reserves, not for salaried people that can provide a pay stub and w-2. Yes, the banks are to blame too. But in the end it was the borrower that decides if he will or can make the payment.
How about a little personal responsibility?
i am curious if the author has any experience in the industry or in losing a home to foreclosure because it seems like this is just another negative commentary back seat driving. When a homeowner gets a notice of default they have to come up with a large sum of money (i.e $15,000) for back payments or foreclosure proceeding start and the bank sells their home at auction. Most Americans live check to check right now and dont have that kind of cash to submit or they wouldn’t have fallen behind in the first place. They try to submit a payment or 2 to the lender and the lender returns their check to them and does not accept it. Good loan modifications bring the borrower current without bringing in the amount on the notice of default and it reduces their interest rate. On a good modification, the past due amount is forgiven and the borrower has a new lower payment that is more affordable. Yes it would be better if the lender reduced the balance to give the homeowner equity again but in most cases they are not doing that. So if loan modifications are just a scam like this article claims, what better alternative do you propose for the homeowner who cant afford their house anymore? a lot of people are out of a job and have gone from being a 2 income family to one or taken a paycut or gotten laid off and their new job pays less. it is devastating for a lot of families to have to move their kids out of their foreclosed homes and guess what? that costs a lot of cash up front to move too and their credit is destroyed. A foreclosure on credit is not almost the same as a loan modification or short sale, that is not correct. There are also greater consequences of the person foreclosing because it drops the neighborhood values more and leaves the neighbors to have to hold on even longer until that foreclosure falls off the radar and their home can appraise with value again. i agree that loan modification companies that take peoples money and dont get the job done and dont refund the homeowners money should face the consequences of stealing these poeple’s money. but i wouldn’t trash loan modifications in general as a promising and less disruptive option for a drowning homeowner. As far as getting a free modification from the lender instead, some poeple need help with the lengthy loan modification process and paperwork and dont feel comfortable doing it themselves. I can go file for divorce in California by myself without paying anything but filing fees but that doesnt mean retaining an attorney is a worthless option. it’s my choice if i want to pay or not. i do not make a living doing loan modifications, but i have seen first hand this service helping people. what we need to look at is why even with the new much improved mortgage terms, people are still defaulting at a high rate for modifications. we have got to get the job market under control so people have sufficient income to handle their obligations
A couple of points. One is federal preemption under the Garn-St. Germain Act in which state housing creditors can do loans on parity with their federal counterparts and preempt all state laws that do not allow them to act on parity. So, if federal lenders can originate negative amortization loans, then so can state lenders and the prohibition has no weight. Except maybe a mortgage broker cannot broker such a loan. However, CFL and RML type lenders most likely can.
Finally, I am glad to see you actually say that “Loan modification services, as permitted by lenders, are nothing more than scams when the loan exceeds the secured property’s value by more than 10% or 15%. ” It is a gutsy and very accurate statement. I would go on to say that it is best for most homeowners facing that situation to walk from their homes as the credit impact of a short sale or a foreclosure is similar and in a foreclosure they can lawfully live in the home until completion of the foreclosure and bank the payments.