Gauging new foreclosure law

Prepare for headlines along this line: “Huge drop in L.A. foreclosure filings in September.” Behind those upcoming headlines: a new state law requiring lenders to make better efforts to talk with homeowners before initiating the foreclosure process.

Sean O’Toole, chief executive of ForeclosureRadar, says the drop-off in some pre-foreclosure filings, such as notices of default, has been dramatic -- declines of as much as 80% in some counties -- and is potentially misleading. He says the implementation of a new state law, Senate Bill 1137, is delaying foreclosure filings but ultimately will not stop them. From O’Toole’s blog, ForeclosureTruth:

“One of the new requirements placed on lenders, loan servicers and/or their agents is to prove that they have attempted to communicate directly with delinquent borrowers about their financial situation, and have considered potential arrangements to avoid foreclosure. The proof of this activity must be filed with the recorded documents -- typically an affidavit attached to the Notice of Default or Notice of Trustee’s Sale.”

O’Toole told L.A. Land he already has seen huge declines in filings in Los Angeles County.

“Typically we see several hundred notices of default every day in L.A. County,” he said. “But on Sept. 8, we saw only 90. On Sept. 9, there were 60. It’s a paperwork issue.”

More from O’Toole’s blog:

“Be careful with drawing any conclusions from the declines. Even national reports may be impacted as CA represents one-third of nationwide foreclosure activity. The reality is that this only delays the process, and unless lenders radically change their position on loan modifications with principal balance reductions, it will likely have little impact other than a delay of the inevitable.”

Playing devil’s advocate, I asked O’Toole whether it was possible the new law could be encouraging lenders to modify mortgages rather than to foreclose.

He says he has seen no evidence of that. For example, the number of scheduled trustee sales is rising, and it probably would be falling if lenders were putting the brakes on foreclosures. Also, there is a major problem preventing loan modifications for California borrowers, O’Toole said: So many borrowers have more than one mortgage, which makes modifications complicated and difficult.