Foreclosure fairness for Californians

It’s been five years since the housing bubble burst, but California lawmakers are finally poised to make lenders do something they should have been doing all along: evaluating less-expensive alternatives to foreclosure before starting the process of repossessing a home. That’s the centerpiece of the foreclosure reduction bill that a legislative conference committee approved Wednesday, setting the stage for a final vote in the Assembly and state Senate next week. Major banks continue to oppose it, but lawmakers should follow the conferees’ lead and send the measure to Gov. Jerry Brown’s desk.

The proposal by Atty. Gen. Kamala Harris (contained in the identical bills AB 278 and SB 900) would ban “dual tracking,” in which one arm of a bank considers a loan modification, short sale or other option for a defaulting borrower while another arm pursues a foreclosure. Five of the largest U.S. banks agreed to a temporary ban as part of a national settlement of mortgage-related complaints, but they and other lenders opposed making such a requirement a permanent part of California law.

The conference committee tightened up the bill in response to the banks’ concerns, limiting the relief to owner-occupied homes and applying many of the strictures only to banks with more than 175 foreclosures per year. Still, the final version requires banks to tell troubled borrowers about alternatives to foreclosure where they are available, and to respond in writing to a borrower’s completed application for one of those alternatives before setting the wheels in motion for a repossession. The bill also includes important protections against the sort of runarounds and procedural shortcuts that banks have inflicted on defaulting borrowers since the housing market collapsed.

The banks’ main complaint has been that the proposal would let borrowers who can’t or shouldn’t be rescued delay their foreclosures even longer. But even if it were to pass, banks could still foreclose at a faster pace than they do today. The limiting factor isn’t regulation, it’s the banks’ capacity to service defaulting loans and their desire not to flood the market with foreclosure sales.

Ultimately, it’s in everyone’s interests for lenders to foreclose only when it makes economic sense to do so. The banks have been their own worst enemies on this front, resisting the most effective forms of loan modifications in an effort to avoid short-term losses. Harris’ proposal wouldn’t require banks to modify loans; it would simply ensure that borrowers had the chance to be considered for the available alternatives, and that they couldn’t be foreclosed on as long as they were complying with the new terms. That’s not just reasonable, it’s overdue.