While draft California Senate Bill Nr.1275 currently under consideration may be welcomed by some as manna in the foreclosure wilderness to help backslid borrowers stay at home while their loan modifications are considered, there is another angle to this piece of social legislation too.
That angle is that the draft legislation goes further than attempting to be a valuable public interest proposal. Behind the scenes and often unmentioned is the disturbing fact that it seeks to replace the beneficial results of years of collaboration reform between lawmakers and delinquent borrowers on the one hand, and the organized financial services industry on the other, with a litigation minefield that will have knock-on effects long after the current property market woes are over.
Let’s consider the facts, not the rhetoric.
The California State Governor signed Senate Bill Nr.1137 barely two years ago. This fine piece of legislation, that was widely supported by both consumer groups and financial services providers, ensured that all lenders would explore loan restructuring alternatives with their clients before moving into foreclosure mode.
Draft Bill Nr.1275 will muddy these clear waters will several unnecessary layers of sludge. While backers claim that it will protect borrowers from foreclosure following service errors, others point out that any service error, no matter how minor, would permit legal stoppage of foreclosure by borrowers who are not entitled to loan modifications. This will have the effect of frustrating bona-fide foreclosure efforts and create a series of legal traps and other precedents that will benefit the legal profession alone. In the long run, it may also make it harder for genuine American households to borrow money to buy their own homes.
The bigger picture
The Treasury Department recently announced modifications to HAMP that make it possible for approximately 1.35 million borrowers to apply for reductions in the capital value of their home loans. Results thus far record a median drop in repayments of $512 a month and a total capital reduction of $3 billion. From June 2010 onwards foreclosure is prevented until a borrower has been fully evaluated – lenders will furthermore be required to write to every client and explain this process in detail.
So why does the State of California need to get involved in the first place?
This is a good question, which the proponents of Draft Bill Nr.1275 still have to answer. From where I sit, the bill is at best an unnecessary duplication of HAMP, and at worst a legal minefield that will do little more than delay legitimate foreclosures, to the benefit of the legal fraternity alone. California foreclosures currently take up to a year, during which time the State is deprived of revenue from the property concerned. If enacted, the Bill will extend this loss and further depress property values.
The banking industry has already agreed that more modifications are possible – I just don’t understand why well-meaning legislators should be allowed to meddle in a complex process.
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