Contra Costa, California Real Estate

I read the entire California Foreclosure Prevention Act, every section, paragraph and sub-paragraph. Who will this really help?

Existing California law requires mortgage lenders to file a Notice of Default as the first step in the foreclosure process.  After the Notice of Default has been filed and a time period of not less than 3 months has elapsed, the mortgage lender may post a Notice of Sale specifying the time and place of the foreclosure sale.

The California Foreclosure Prevention Act adds an additional 90 days to the timeframe between Notice of Default and Notice of Sale....

If the loan:

• is a first mortgage
• was recorded between January 1, 2003 and January 1, 2008
• is serviced by a loan servicer that has not implemented a "comprehensive loan modification program"
• is not made, purchased or serviced by a California state, or local public housing agency or authority and the loan is not collatreral for securities purchased by any such agency

and If the borrower:

• occuppied the property as their principal residence at the time the loan became delinquent
• has not surrendered the property as evidenced by a letter confirming the surrender or the delivery of the keys to the lender
• is willing and able to pay under the modification agreement
• is not currently in bankruptcy (court mandated foreclosure delays apply in the case of bankruptcy)
• has not contracted with "an organization, person or entity whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries."

and If the 90 day moratorium won't "require a servicer to violate contractual agreements for investor-owned loans."

So what are the significant loopholes that I see? 

The first loophole is that the loan is not serviced by a lender offering a "comprehensive loan modification program" defined as one that includes some combination of the following features:

• An interest rate reduction for a fixed term of at least 5 years
• An extension of the amortized period for the loan term, to no more than 40 years from the original date of the loan
• Deferral of some portion of the principal amount of the unpaid balance until maturity of the loan
• Reduction of principal
• Compliance with a federally mandated loan modification program

Most lenders are currently offering note modifications to homeowners in distress that meet the "combination of features" requirement.  They provide an interest rate reduction for a fixed period of 5 years with an extension of the amortization period (from 30 to 35 years, for instance).  I have yet to see a lender offer a principal reduction but they aren't required to if they offer the combination of the first two items.  While encouraging these note modifications is the entire intent of the law, does this combination of features really help California homeowners or just delay the pain?

Since many homes have lost 40% - 50% of their value, it would require an appreciation rate of more than 10% per year starting immediately to have viable options to refinance or sell in 5 years when the modified payment ends.  Given the fact historical appreciation is 8% per year, it is fairly clear that the 5 year fixed period for the payment reduction simply delays the pain in many cases.

The second loophole is that the 90 day moratorium won't be enforced if it requires a servicer to violate contractual agreements for investor-owned loans.  Perhaps it is my lending background that made this particular item jump off the page for me.  A large percentage of California mortgages were securitized and sold to investors with the originating company/bank acting only as the Servicer (i.e. they are paid for the accounting functions on the mortgage such as collecting the monthly payments and paying the property taxes from impound accounts). 

The Servicers ability to offer note modifications on those loans is limited by the contractual agreement with the investor.  Some investor contracts prohibit note modifications and some allow note modifications only to a certain percentage of the loans sold with that specific "pool" of mortgages.  Even if the Servicer wants to offer a note modification, they are often limited or prohibited by their contractual agreement.


And then there is an important item that isn't even addressed.............

Extending the timeframe from 3 months to 6 months between the Notice of Default to Notice of Sale doesn't guarantee a modification.  During that time, the homeowner is increasing the balance on which they could ultimately pay State and Federal income taxes unless they qualify for the Mortgage Forgiveness Debt Relief Act or are Insolvent per IRS guidelines.


To answer my original question "Who will this Act help?".  In my opinion, the Act will help homeowners who have:

• A lender that retained the mortgage in their portfolio versus selling it in a pool to investors
• Been struggling to reach the Note Modification department to no avail OR
• Submitted their Note Modification paperwork and have been waiting for an answer
• Willingness and ability to pay the monthly mortgage payment at 38% of their Gross Income
• Current property value that has declined 20% or less 

A link to the Foreclosure Prevention Act in its entirety can be found on my website.