A package of bills designed to protect California homeowners facing foreclosure and signed into law Wednesday have drawn praise from consumer groups and criticism from some industry participants.
Identical bills S.B. 900 and A.B. 278, which make up the key provisions of the legislation, were passed by the state Legislature last week and will go into effect Jan. 1, 2013.
Known as the Homeowner Bill of Rights, the legislation bans so-called "dual tracking" and will stall the foreclosure process while mortgage servicers review applications for a loan modification.
Servicers will be required to decide whether borrowers qualify for a loan modification before continuing to pursue a foreclosure. Should the servicer deny a borrower’s application, that servicer is required to tell the borrower, in writing, why the application was denied and that he or she has the right to appeal.
"Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner," California Gov. Jerry Brown said in a statement released after he signed the bill. "These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite."
Opponents of the legislation worry that slowing the foreclosure process will hamper a housing market recovery. A study commissioned by the California Mortgage Bankers Association and other financial services organizations concluded that the legislation would help only "a tiny fraction" of homeowners who are behind on their payments.
The study, conducted by research firm Beacon Economics, predicted that the Homeowner Bill of Rights will increase costs for loan servicers, reduce home values, and make credit less available to California homebuyers by raising the risk of lending.
"However well intentioned, these bills are unneeded in a housing market that has just begun to find its footing and is starting to recover from one of the worst crashes in history," Christopher Thornberg, Beacon Economics’ founding partner and the study’s lead author, said in a statement.
"These kinds of interferences that lengthen foreclosure processes have been shown to do little for current borrowers who are behind on payments, and can actually incentivize some to default, increasing foreclosure rates," Thornberg said. "They have also been shown to be detrimental to new borrowers because they result in reduced availability of credit."
The Homeowner Bill of Rights requires lenders to provide struggling homeowners with a single point of contact, either a person or a team, knowledgeable about the borrower’s situation and responsible for handling documentation between the homeowner and the loan servicer. That provision is intended to address complaints from homeowners that they have had to repeatedly submit paperwork to multiple staff members of the same institution in the past.
There are also new penalties for "robo-signing," a much-maligned practice in which mortgage servicers signed foreclosure documents without first verifying their accuracy. The bill requires that servicers review "competent and reliable evidence to substantiate the borrower’s default and the right to foreclose" before recording or filing foreclosure documents. Repeat violators would be subject to civil penalties of up to $7,500 per loan.
Should a bank commit a "material" violation of the legislation, borrowers would be allowed to file for an injunction to stop their foreclosure until the violation had been corrected or remedied. Borrowers would also be able to sue for up to $50,000 in damages should banks commit a material violation willfully, intentionally or recklessly. Banks would not be liable if they fixed the problem before completing a foreclosure.
With about half a million Californians currently in the foreclosure process and 2 million more with homes underwater, proponents of the legislation say the Homeowner Bill of Rights will help keep creditworthy families in their homes, hold banks accountable, and bolster the state’s economy.
"These common-sense reforms will require banks to treat California homeowners more fairly and bring more transparency and accountability to their practices in our state. Responsible homeowners will have a better shot to keep their homes," said California Attorney General Kamala Harris, who introduced the legislation.
The California Reinvestment Coalition, which counts nearly 300 nonprofit organizations and public agencies in the Golden State among its members, said the bill "has been a long time coming."
"Many California groups — nonprofit housing counselors, public interest lawyers, faith-based groups, organizers, online groups, and consumer and policy groups — worked tirelessly for three years to convince the state Legislature to pass this bill to bring fairness, decency and reason to the foreclosure process, and let families and their communities rebound," the group said in a press release.
Kevin Stein, the group’s associate director, noted that the legislation contains provisions that were included in the $25 billion robo-signing settlement with the nation’s five biggest mortgage servicers announced earlier this year. California is slated to receive the bulk of the funds, $18 million.
"The legislation extends the impact of the (settlement) so that all homeowners in California, regardless of which bank services their loan, have the same protections and rights," Stein said in a statement. He said California’s bill should "serve as a national model for other states looking to enforce the settlement and protect homeowners."
The California Association of Realtors opposed the legislation, and successfully lobbied to make the language surrounding robo-signing and verification of chain of title less stringent than in the original bills, which were modeled on a law in Nevada that went into effect in October 2011.
"What we saw coming out of Nevada was pretty dramatic. (There is) effectively a moratorium on foreclosures there. In Nevada, there are civil and criminal penalties attached to even legitimate error," and mortgage servicers are required to verify every step on the chain of title of the foreclosed loan, said CAR lobbyist Stan Weig.
"Bankers were telling us that they either weren’t going to lend or dramatically increase their credit standards if they couldn’t go after the house that was used to be the security for the loan, or make (loans) more expensive. And we believed them because that’s what happened in Nevada."
In a statement, CAR declared the final version of the bills "much-improved," but noted its continued opposition to the legislation because "it will encourage the filing of lawsuits intended for delay and further discourage lending."
"It affects Realtors by making it much more difficult to get a loan — if you can’t get financing, you can’t close a deal," Weig said.
The possibility of increased litigation against lenders will also slow the foreclosure pipeline that constitutes about half of California’s current home sales, he added.
"Somewhere around a quarter of our market is REO (real estate owned) properties and another quarter of our market is short sales, and both of those are thrown into limbo if it’s too complicated to do a foreclosure. If there isn’t a foreclosure, there isn’t an REO," Weig said.
Sean O’Toole, founder and CEO of ForeclosureRadar, also noted the probability of reduced home sales.
"The most ironic part of this bill’s passage is that foreclosures have already plummeted, and that the real housing crisis is now a lack of homes available for sale. Next spring, we expect there will be half as many REOs available for sale in California, significantly impacting overall home sales and hurting homebuyers, investors, real estate-related services and the economy," O’Toole said in a statement.
He noted that only about 4,000 properties went back to the bank as REOs in June, down 60 percent year over year.
"And if it takes 272 days to resell those, that means a very likely decline in home sales next March. So this low-inventory situation that we’re in right now is going to get significantly worse even without the passage of this bill, and if this bill does impact foreclosure rates it will continue to get worse into 2014," O’Toole told Inman News.
He blasted the legislation, which he said "naively thinks that slowing foreclosures will benefit homeowners and the economy by leaving those owners stuck in their prison of debt."
"Bottom line is we think they’re working on the wrong problem. Foreclosures are part of the solution, not the problem. Negative equity is the real problem, and this bill does nothing to help homeowners underwater get out from being underwater," O’Toole said.
According to a report released by CoreLogic today, California had the sixth-highest negative equity share among states in the first quarter, with 30.5 percent of its mortgaged residential properties underwater. Only Nevada (61 percent), Florida (45 percent), Arizona (43 percent), Georgia (37 percent) and Michigan (35 percent) had a greater proportion of underwater homes with mortgages.
"We had this massive housing bubble and then price decline, which left a lot of folks underwater in their homes," O’Toole said. "Foreclosures, when they occur, clean up that negative equity. The home gets resold to somebody with more traditional financing that can make the payments, and we get back to a more normal housing cycle."
Short sales or principal balance reductions are a better outcome than foreclosures, O’Toole said, "but nothing in the Homeowner Bill of Rights will ensure that we see more of either of those."