By Derik N. Lewis, Esq.
After a series of failed attempts at helping homeowners in foreclosure, California lawmakers are now proposing a state-mandated mortgage mediation program. Will this provide needed relief to distressed borrowers or just throw another speed bump at lenders and slow down the recovery?
Assembly Bill 1639 passed committee and will head to the California State Assembly floor this week. If this bill becomes law, it would establish the Facilitated Mortgage Workout (FMW) program which would require lenders to meet with borrowers in order to develop a modification plan before they could proceed with foreclosure.
Basic eligibility for the program is as follows:
- The property must be an owner-occupied principal residence.
- The loan must be a 1st mortgage originated prior to Jan 1, 2009.
- The unpaid principal balance can’t be more than $729,650.
- The law doesn’t apply if the borrower has already been offered a loan modification that would cut the borrower’s housing related debt to 38% or less of the borrower’s gross income.
Everything sounds good so far, but, as with other foreclosure prevention programs, the devil is in the details.
Although the law would “require” lenders to meet with borrowers prior to proceeding with foreclosure, the burden for initiating the program rests fully on the borrower’s shoulders (the program isn’t automatic commenced). The borrower must take substantial measures to activate the program. The lender does have to provide notice of the program in the Notice of Default (the recording of this “NOD” commences the statutory foreclosure process). This is where the problem starts. Most borrowers simply ignore the Notice of Default because they are overwhelmed once the foreclosure officially commences. As required by statute, borrowers receive about a dozen copies of the NOD all at once (some are certified mail, some are regular mail, and some are posted at the home). I have personally seen borrowers simply collect all the mail from the lender, including the NOD, and shove it all in a drawer, unopened.
Further, even if the borrower opens the NOD, the mediation program notice will be buried behind multiple pages of recently enacted statutory required disclosures. Borrowers may never even learn of the new mandated program and will most likely miss the 30-day deadline to opt in even if they do find the notices.
If the borrower actually receives and reads the notice and then wishes to opt into the mediation program, the borrower must complete a (yet-to-be determined) form and return it to the administrator of the program within 30 calendar days of receiving the notice of default. Further, the borrower will be required to provide “other information” within 15 days of the request to participate (tax returns, income verification, a “specified deposit of funds” and a hardship letter).
The major blow to this program is the requirement that borrowers deposit 50% of their current mortgage payment each month with the administrator while the borrower is negotiating the modification. Of course, those payments go to the lender if a loan modification fails, which they do more than 60% of the time. We have already seen that most loan modification programs simply don’t work. For loan mods, there is a narrow window between the front-end DTI analysis and the Net Present Value test. If the numbers don’t fit, you fail the program. Therefore, the borrower has to come out of pocket to get into a program that has already been proven to fail more than 60% of the time. Not great.
As for the “required” in person meeting being touted in the Bill, that meeting only occurs after the borrower has opted into the program, has met all of the obligations under the law, and deposited the 50% of the mortgage payment with the administrator.
There are good things about the program that should be noted. This bill has some teeth to slow down the foreclosure process and give the borrower a chance to really think through the options (including negotiating a short sale or possibly a “planned foreclosure” with a cash-for-keys exit). There is also strong language requiring the lender to suspend the foreclosure process while the borrower is actually negotiating in the program. The Bill requires a third-party “conciliation officer” to be involved which might give the lender some perspective on the situation. Finally, there are tight guidelines to get an answer from the lender.
These high points aside, it is hard to be optimistic that this program will help many homeowners. Prior foreclosure moratoria and loan modification programs (both state and federal) have been unmitigated failures. First, we had the California’s Foreclosure Reform Law (Senate Bill 1137), which “added” a 30-day period before the NOD could be filed. The word added is in quotes because lenders typically wait something like 90 or 120 days after the borrower is in default before filing for foreclosure, so there really is no additional time granted to the borrower. This was pointless legislation Then, the California Foreclosure Prevention Act (ABX2 7 and SBX2 7) added an additional 90 day period between the NOD filing and the Notice of Trustee Sale (this “NTS” sets the actual foreclosure auction date for the home). However, that law provided an exemption that my 3 year old daughter could find her way through. Therefore, essentially no lender is subject to the extra 90-day period whatsoever. This was also pointless legislation. Finally, we all know about the ongoing failure of the Treasury’s much hyped HAMP modification program.
For all its good intentions, Assembly Bill 1639 appears to be just more of the same: Pointless legislation.
About the Author:
Derik N. Lewis is a California real estate broker and a practicing real estate attorney. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners, investors, and developers find alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced real estate attorney by contacting Derik or (949) 613-5900.