Banks foreclosed on almost 200,000 homes in California last year, and this year’s toll is expected to be even higher. State lawmakers have tried to encourage banks to do more loan modifications that help both sides, keeping borrowers in their homes while cutting lenders’ losses. Yet homeowner advocates say a serious problem remains. Overwhelmed and disorganized, lenders continue to foreclose on borrowers who are in the process of negotiating new loan terms. At a time when the market is flooded with repossessed properties, that’s just inexcusable.
The main federal effort to avert foreclosures, the Home Affordable Modification Program, bars lenders from foreclosing while a modification is pending, but other initiatives don’t. Now, state Sens. Mark Leno (D-San Francisco) and Darrell Steinberg (D-Sacramento) are proposing to extend the same protection to all Californians seeking loan modifications. Their bill (SB 1275) would bar a lender or loan servicing company from starting a foreclosure until after a modification application is denied. It’s a modest change that wouldn’t require lenders to change the terms of any loan modification effort. Nor would it require lenders to do more to reach borrowers before foreclosing than state law already requires or to slow down foreclosures on borrowers who are beyond help.
What it would do is require lenders to notify borrowers who fall behind on their payments about the foreclosure process and the availability of loan modification programs, if any. And if borrowers applied unsuccessfully for a modification, the lender would have to send them a letter explaining why they were denied and how they can appeal the decision before filing a notice that the mortgage was in default.
Banks complain that the bill would further drag out foreclosures, add a new layer of requirements and expose them to lawsuits. Sponsors have done a good job addressing the first two complaints, and the third is easy to dismiss. The requirements would be meaningless if they couldn’t be enforced, and the state Department of Corporations doesn’t have the capacity (or, in the case of federally chartered banks, the authority) to do so.
The point of the bill isn’t just to help more homeowners; it’s also to save lenders from themselves. Housing counselors say the No. 1 problem is poor communication between lenders and troubled borrowers, and within the lenders’ own operations. Servicers typically assign foreclosures to one team (often an outside law firm) and modifications to another. SB 1275 would end the common practice of sending troubled borrowers down an inexorable path to foreclosure regardless of whether it’s in the lender’s financial interest to do so.