Foreclosures and loan modification programs


Despite the vital interest that both lenders and borrowers have in avoiding money-losing foreclosures, the number of failing mortgages remains stubbornly high. Part of the problem is borrowers who’ve sunk too deeply into debt — they bought homes they simply couldn’t afford, or their income plummeted during the recession. But another part is the inability of some loan servicers to deal with the volume of defaults that ensued after the housing bubble burst and the economy collapsed. This dysfunction has led to steep losses for banks and homeowners that could have been avoided had loan servicing companies been up to the challenge of developing effective modifications on a mass scale.

One symptom of the dysfunction has been the number of homeowners who’ve been foreclosed on while the bank was in the midst of modifying their loan. A recent survey of housing counselors by the Center for Responsible Lending found that 60% had clients who lost their homes while they were negotiating modifications with their lenders. The state Senate passed a bill earlier this year (SB 1275) that aims to prevent such breakdowns, barring lenders from starting foreclosure proceedings against borrowers until after they’re found to be ineligible for a modification. It’s a small but sensible step, and we urge the Assembly to move the bill forward.

The proposal would require lenders to make a good-faith effort to notify defaulting borrowers about the availability of any loan modification programs. If a borrower applied for a modification but didn’t qualify, the lender would have to send a letter explaining the decision and giving an opportunity to appeal before filing a notice that the mortgage was in default.

Foreclosure: An Aug. 17 editorial about legislation to aid troubled borrowers misidentified the Center for Responsible Lending as the source of a survey of housing counselors. The survey was conducted by the California Reinvestment Coalition. —

The Schwarzenegger administration recently weighed in with complaints about the bill. Noting that the main federal mortgage modification program imposes the same notification requirements on lenders before filing a notice of default, the administration argued that SB 1275 was unnecessary. But as the Government Accountability Office has noted, the federal program has no penalties for lenders that don’t comply with its requirements. SB 1275 would allow borrowers to go to court to force compliance, but the remedies are limited — it wouldn’t necessarily save them from foreclosure, but it would give them a chance to make their case for a modification.

Nothing in the bill would compel lenders to give troubled homeowners a break if it wasn’t in the lenders’ financial interest to do so. It simply tries to stop overwhelmed banks from forcing borrowers out of their homes before making sure they’re not qualified for one of the loan modification programs the banks participate in. That’s a reasonable precaution, and lawmakers should take it.