Editor’s note: This story has been edited to clarify that SB 1178 had not been signed into law.

The California Assembly has rejected a bill that would have placed more homeowners under the protection of an existing state law that requires loan servicers to consider distressed borrowers for a loan modification before beginning foreclosure proceedings on them.

SB 1275, which sailed through the Senate on June 3 in a 21-12 vote, failed to garner enough support in two Assembly votes. The bill went down to defeat Monday in a 30-36 vote that was mostly on party lines, with Democrats supporting the bill and Republicans opposed.

The Center for Responsible Lending issued a statement Wednesday calling the bill "the major foreclosure prevention legislation of the session," and attributing the bill’s defeat to "a massive lobbying blitz from banks and other mortgage industry lobbyists."

California already has a law on the books requiring loan servicers to contact distressed homeowners and consider them for a loan modification before beginning foreclosure proceedings. But the law applies only to homeowners who took out a mortgage between Jan. 1, 2003, and Dec. 31, 2007.

SB 1275 would extend those protections to borrowers who took out a mortgage before Jan. 1, 2009, if their loan is subject to review under the federal Home Affordable Modification Program (HAMP).

Lenders would also be required to contact borrowers and consider loan modifications before beginning foreclosure proceedings on any loan taken out between Jan. 1, 2003, and Jan. 1, 2009, regardless of whether such a review is required under HAMP.

Because an estimated 25 to 30 percent of loans are not subject to HAMP, the bill would have widened the pool of protected borrowers.

"SB 1275 would have implemented modest procedural changes to give all borrowers a fair shot at a loan modification before their home is foreclosed," said Paul Leonard, the director of the Center for Responsible Lending’s California office, in a statement.

Leonard said "intense lobbying efforts" prevented lawmakers from putting in place "minimum safeguards that would help avoid unnecessary foreclosures, even though they would benefit both homeowners and loan servicers."

Sean O’Toole, founder and CEO of ForeclosureRadar.com, a company that tracks homes through the foreclosure process, called SB 1275 "poorly written, overly complicated (and) unnecessarily burdensome."

The bill’s biggest flaw, O’Toole said, was that it would have given homeowners up to a year after a sale to void the foreclosure — a provision that "would lead to blight and chaos" because title companies would be wary of insuring resales within that window.

Had the bill passed, "I think it would have been disastrous in the near term" for brokers and auction investors who specialize in bank-owned (REO) properties, O’Toole said. "That said, I would love to see servicers forced to give homeowners clear decisions on loan mod applications and short-sale offers within a reasonable time frame, say no more than 30 days."

However, that’s a directive that probably needs to come from federal rather than state officials, he said. …CONTINUED

"The state is in an interesting position in that it has no real control over federally regulated lenders outside of the foreclosure process," O’Toole said. So California lawmakers "continue to monkey with the foreclosure process in an attempt to force lenders to do things they don’t have the power to enforce directly."

On average, O’Toole said, homes going to foreclosure in California have about $150,000 in negative equity, and "at the end of the day someone has to take that loss."

California lawmakers "can create all the busy work they want for lenders and servicers, but they can’t force federally regulated lenders to take that loss, and they don’t have the money to bail out homeowners directly, so in the end their efforts will prove meaningless."

Democrats enjoy a 50-27 majority over Republicans in the Assembly, but 12 Democrats abstained from Monday’s vote on SB 1275 — including three members who’d originally voted for the bill.

Amy Alley, a spokeswoman for Assemblyman Sandre Swanson (D-Alameda), said that while Swanson voted for the bill on Aug. 24, he abstained on Aug. 30 because substantive issues raised by the bill’s opponents were not addressed between the two votes.

"He thought there should have been some kind of compromise, some kind of meeting of the minds, but that it hadn’t been worked on" before coming to a vote for a second time, Alley said.

A spokesman for Assemblyman Marty Block, a Lemon Grove Democrat who abstained from both votes, said Block did not support the bill.

While Block believed "there were aspects of the bill that were positive, it was ultimately too overreaching, and would lead to ever-increasing litigation that would hinder the state’s economic recovery efforts," said his spokesman, Mike Naple.

In other California legislative action, lawmakers passed a bill in August providing some protection from deficiency judgments for borrowers who refinanced their mortgages.

California already prohibits lenders from pursuing deficiency judgments against homeowners who default on their original purchase mortgage.

SB 1178 extends protection from deficiency judgments to homeowners who have refinanced, but only up to the amount of their original loan.

The bill passed the state Senate in a 30-4 vote on June 3 and was approved by the Assembly 60-17 on Aug. 19, but must still be signed by Gov. Arnold Schwarzenegger for it to become law.

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