State lawmakers weigh bills to help homeowners hit by foreclosure


With thousands of Californians facing foreclosure on their underwater mortgages each month, state lawmakers are rushing in with measures to help them cope with their loans and possibly stay in their homes.

Three bills moving through the state Assembly after passing the Senate would delay the start of the foreclosure process and limit lenders’ ability to force borrowers to cover the difference when their home is sold for less than the amount they owe on their loan.

On Tuesday, the Assembly Judiciary Committee approved the most controversial of the measures. The bill would ban creditors from seeking so-called deficiency judgments from borrowers who can afford to make monthly payments yet walk away from a refinanced home that is underwater, meaning that the house is worth less than the loan on it.


Such strategic defaults recently emerged as a growing problem for the banking industry. They accounted for 31% of all foreclosures nationwide in March, according to researchers at the University of Chicago and Northwestern University. That’s up significantly from 22% the previous March.

“We’ve had bank bailouts,” state Sen. Ellen Corbett (D-San Leandro) said. “It should only be fair in this economy that we try to figure out ways to help homeowners as well.”

Corbett authored the bill to protect borrowers from being hit with an order to pay whatever portion of the loan amount that isn’t covered by a bank’s sale of the foreclosed property.

Helping homeowners is a matter of balance, Corbett said. Her bill, SB 1178, would insulate refinancers from deficiencies up to the value of their original purchase loan. But borrowers would remain vulnerable for any refinanced loans exceeding that level.

The battle over Corbett’s bill pits bankers and the mortgage industry against the California Assn. of Realtors.

Lenders oppose provisions that would make the ban retroactive to cover existing home refinancing contracts that go into foreclosure after July 1, 2011. They would like the bill to cover only refinancings done after that date.


“It sets a bad precedent to change the rules in the middle of the game,” said Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn.

Realtors, however, are hoping to keep people from being doubly punished by losing their homes and burdened with more debt. They want to bolster a still weak housing market by giving homeowners a chance to get back in the market soon.

“They’d be in a better position if they’re not confronted with signing away their lives,” said Alex Creel, senior vice president for governmental affairs of the California Assn. of Realtors.

A second foreclosure-related bill passed by the Assembly committee Tuesday would prohibit bankers from attempting to collect deficiency payments after a homeowner gives up the property in a short sale. In such sales, banks and homeowners agree to allow sales of houses at less than the loan amounts and avoid foreclosures and black marks on the borrowers’ credit histories.

The third measure would delay the start of a foreclosure process by giving owners more time to work with lenders on a plan to modify loans to lower monthly payments, allowing borrowers to stay in their homes.

Although foreclosure activity is down substantially from a year ago, the numbers remain high, and some experts see another wave soon of foreclosures, short sales and signings of deeds to banks to avoid foreclosures.


In May, 23,911 Californians received notices of default — the first step in the foreclosure process — and 27,841 got notices of trustee sale, according to online tracking service Default notices dropped 43% in May compared with May 2009, while trustee sale notices fell 36%.

RealtyTrac, another data analyst, reported that California in May was home to six of the top 10 U.S. metropolitan areas with the most foreclosure filings. Those areas were Riverside-San Bernardino, Bakersfield, Merced, Modesto, Stockton and Vallejo-Fairfield.

Corbett said her measure was particularly needed because few borrowers know that when they refinance their homes for more than the original loan amount, they lose their protection against being hit with deficiency bills, a state law that went on the books in 1933 during the Great Depression.

In recent decades, the deficiency threat was minimal because home values invariably rose, leaving owners with plenty of equity to cover the payoff cost of their refinanced mortgages in the event of a foreclosure. But that changed when the California housing bubble burst in the last three years, sending the statewide median home price plummeting 42%.

Bankers, who have been negotiating with Corbett and the Realtors group, say they sympathize with the call to aid borrowers who refinanced their homes to take advantage of better terms or interest rates.

They persuaded Corbett to not extend protections to borrowers that took cash out of their refinancing, even if the extra money was used to improve properties.


The two deficiency protection bills “place the right balance of risk between the homeowner and the lender,” said Sean O’Toole, ForeclosureRadar’s founder and chief executive.

However, O’Toole said the third bill to push more loan modifications beyond what federal authorities and lenders themselves were doing was “misguided.” That legislation won’t work if government agencies and lenders don’t come up with billions of dollars to reduce monthly principal payments sharply, he said.

“Homeowners that are saddled with uncertainty are less likely to be productive consumers,” O’Toole said. “That’s part of the reason why our economy is still struggling.”