Putting a face on foreclosure

The ethnic demographics of California borrowers in foreclosure are also radically out of balance. Latino borrowers make up 32% of the population 18 or older and 22% of the population of homeowners, yet comprise 48% of foreclosures in California.

Further, 54% of African American homebuyers and 47% of Latino homebuyers were charged higher interest rates on their mortgages for SFRs than non-Hispanic, Caucasian borrowers. The evidence suggests lenders targeted these borrowers for ARMs and steered them towards unacceptable loan terms without any economic justification for their actions. [For more information regarding lender discrimination, see the September 2010 first tuesday article, Who suffered the most in this California foreclosure crisis?]

Abusive lending is inevitable when lenders are left unchecked and real estate brokers steer their buyers towards quick and relaxed lending sources without exercising the full extent of their required due diligence. During the Millennium Boom, everyone — even the government — was intoxicated by the flourishing housing market, enhanced living standard and better paying jobs available to the under-skilled and less-educated work force. Homeowners were content to rely on their ability to refinance or resell to keep them in homes.

Now that Californians are confronted with the devastating consequences of a reckless housing boom, society is forced to reassess its blind ideological confidence in a real estate market that has, in California, time and again demonstrated its propensity to tank when improperly regulated. [For more information regarding economic ideology, see the October 2010 first tuesday article, Is homeownership a luxury or necessity?]


California’s non-judicial foreclosure policy

California is a non-judicial foreclosure state. In California, when a homeowner defaults on his mortgage, a Notice of Default (NOD) is recorded by the lender or the lender’s trustee and a copy is mailed to the homeowner.

Once the NOD is recorded, the lender must wait three months before advertising the sale of the property by auction, during which time the homeowner may cure the default. After the three-month period has expired, the lender records and posts a Notice of Trustee’s Sale (NOTS) setting the date of sale in no less than 21 days, and mails the homeowner a copy. The lender or lender’s trustee may then proceed to sell the property on that noticed sale’s date. The highest bidder at the sale is granted title by the lender or the lender’s trustee by recording a trustee’s deed. [California Civil Code §2924]

Thus, a mortgage lender’s decision to foreclose and “repossess” a property does not involve a judge to oversee the lender’s conduct. This non-judicial foreclosure process is quicker and less expensive than a judicial foreclosure, but the distressed homeowner is left without the protection of judicial review of a lender’s conduct and reason for foreclosing. Lenders, who almost always know more about the rights of homeowners than the homeowners themselves, leave no room for questions when recording an NOD, an NOTS or a trustee’s deed. Homeowners are left to trust the private system without oversight by an intermediary just as versed in mortgage foreclosure requirements as their lender and their lender’s trustee. What is missing from the non-judicial foreclosure process is accountability. To provide consumer protection for homeowners, the courts must get involved.

The coming reform of the real estate market

Foreclosure in itself is a necessity for a healthy capitalist economy. Defaulting homeowners must face the consequences for their non-payment and lenders must be able to resort to their security if they are not paid as agreed. A foreclosure crisis is a natural outcome of loose lending, job loss and recession. Moving forward, legislators have the opportunity to ensure future homeowners will be given prudent counsel by real estate brokers and their agents before acquiring a mortgage and lenders will be held accountable for their underwriting.

Defaulting homeowners must face the consequences for their non-payment and lenders must be able to resort to their security if they are not paid as agreed.

Even when the foreclosure rate returns to normal as economic recovery allows more homeowners to stay in their homes, the neighborhoods indirectly affected by foreclosures will remain stigmatized until memories fade. It is vital for legislators to increase community preservation efforts, particularly in California’s urban nuclei. Vacant REOs must be maintained and managed by lenders or local government entities in order to keep the rest of the neighborhood thriving. That duty can be legislated so neighborhoods can enlist local district attorneys (DAs) to step up and protect the community.

The Neighborhood Stabilization Program (NSP) is a federal aid program devoted to preserving neighborhoods hit hardest by foreclosures nationwide. $93 million has been invested in rehabilitating California neighborhoods, but the program is by no means adequate to address the plight of local communities. Increased funding and attention to this program by the California government is vital. [For more information regarding the Neighborhood Stabilization Program, see the California Department of Housing and Community Development.]

The government is slowly stepping in to increase consumer protection efforts and ensure future homebuyers they will be serviced by lenders held responsible for their paperwork. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, first-time homebuyers will be required to complete housing counseling before obtaining a mortgage. Mortgage loan brokers (MLBs) will no longer be permitted to collect yield spread premiums (YSPs), and will thus have no incentive for charging those less-informed, misdirected or ill-advised homebuyers a higher interest rate than is readily available to them in the market. [For more information regarding consumer protection legislation, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement; for more information regarding YSPs, see the October 2010 first tuesday article, How to make money as an endorsed, registered, law-abiding RESPA mortgage loan broker.]

Still, it is up to the gatekeepers of real estate — prudent agents and brokers with extensive experience — to guide homebuyers to a mortgage they can comfortably fit into their budget, now and into the distant future. Agents who are motivated by what they’ve learned in the Great Recession and who are correctly trained by their brokers will exercise due diligence in their duty to advocate for their clients. Homebuyers must be taught how to shop for a mortgage with the best rates and terms, and what impact a Fair Isaac Company (FICO) score has on their options. The consistent and conscientious performance of these duties will have the greatest impact on changing homebuyers’ ill-formed response to abusive lending. [For more information regarding mortgage shopping, see the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage and the May 2010 first tuesday article, Shop, shop, shop until you drop; for more information regarding the economic IQ of homebuyers, see the September 2010 first tuesday article, The era of the financially illiterate homebuyer; for more information regarding the FICO score, see the June 2010 first tuesday article, The FICO score delusion.]