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.