Read our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Notices of Trustee Sale fell 18.91% back down to expected levels after a 22% spike last month
• Cancellations drop 13.75%, a reversal of last months trend, but remain up 75.10% year over year
• Pre-Foreclosure inventory was down 20.18% from June, indicating that lenders may be noticing sales more quickly
• Discounting on the courthouse steps continues to climb since the beginning of the year, up approximately 5% since January to 21.6%
• Time-to-Foreclosure was down month over month by 3.42% to 226 days
• Time-to-Resell fell slightly for 3rd Party investors to 164 days, a 3.53% decline month over month.

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I spoke last week at a real estate investment club and shared with the audience my belief that foreclosures will trickle out over a very long time rather than come as a wave of foreclosures as others continue to inaccurately predict.

I do however, understand the nature of those predictions. Given the number of households that aren’t paying their mortgage (delinquencies) we should be seeing a massive wave of foreclosure notices, and ultimately foreclosure sales. It’s a logical conclusion. But this has become a political problem in a world of financial fantasy, so I don’t believe that simple logic applies.

The reality is that through financial engineering (interest only, subprime, swaps, option ARMs, negative equity, stated income, etc.,) we created trillions in excess mortgage debt that has left millions of homeowners underwater, financial institutions on the brink of collapse, and the FDIC nearly insolvent. Back in September 2008 it became clear that financial collapse was imminent, and the federal government did what it does best – bailed out those who caused the crisis while leaving taxpayers holding the bag for the losses. Pulling this hat trick off required one simple ruse – getting everyone to believe that those losses ultimately wouldn’t be very big.

To do this the government changed the rules. The FDIC who previously forced banks to get bad assets off their books became a leading proponent of saving homeowners with loan modifications that likely just delay the inevitable. With a little government pressure, the supposedly independent Federal Accounting Standards Board was pressured into letting banks account for loans at theoretical values based on computer models rather than current market value.

Next they began rolling out an acronym soup of programs, which they promoted as being help for America’s homeowners – HAMP, HAFA, HARP, 2MP and more. But the reality is that to date these programs have resulted in little more than delays. The government and lenders say that these failures are due to complexities of implementation, difficulty reaching homeowners and a sundry other things. But what if these programs were never intended to succeed? What if they were simply intended to create delays, provide false hope, and maybe get the banks a bit more cash out of homeowners in the form of trial loan modification payments?

Sounds like a crazy conspiracy theory, I know, but hear me out.

The problem faced by both lenders and the government is that they can neither afford to kick homeowners out, or bail them out. For lenders, either scenario forces losses to be recognized, while thanks to mark-to-model accounting rules, and little or no pressure to foreclose from the FDIC, they can instead leave non-paying homeowner in place and push those losses into the future. Many believe that most major corporations manage earnings, what could be more perfect than getting to choose when, and if, they recognize mortgage related losses. For the U.S. government either scenario is political death. Politicians have no appetite for allowing banks to put families on the street en masse through foreclosure, nor forcing banks to deal with the problem through bankruptcy cram-downs or other means. At the same time they realize their constituents who do pay their mortgage (or rent) simply won’t stand for a taxpayer funded bailout of their upside down neighbor. Instead, it seems they believe bailouts should be saved for the truly deserving like the executives and corporate shareholders of banks, AIG, GM, etc.

If we aren’t willing to either kick non-paying homeowners out of their homes, or bail them out, what other option is there? The answer is clear. It’s the same thing we’ve done with national deficits for years. Trade tomorrow for today, with a policy of extend and pretend. I have no doubt this is the present policy, and that this will be the policy for years to come as we work through wiping out the trillions in excess negative equity that was created during the bubble.

A member of the audience during my talk asked if this policy was really possible, after all we can’t just let non-paying homeowners stay in their homes forever. If paying homeowners figured that out, everyone would stop paying, and then our financial system would crumble.  I agree, and it’s clear the banks realize this too. But it is a problem that is easily solved by the diabolical game of Russian roulette. So long as lenders continue to foreclose on at least a handful of homeowners each month, in what from all appearances is a completely random game of chance, they’ll keep those willing and able to pay their mortgage doing so. Those who decide not to pay their mortgage will find themselves playing today’s update on the Russian game, Foreclosure Roulette, wondering each month whether they’ll get another free month in their prison of debt, or finally be shot and forced to move.

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Today I came across a recent study on foreclosure sales and house prices by an MIT economist and two Harvard researchers. MIT just issued a press release so the study is now making headlines.The researchers looked at 1.8 Million transactions in Massachusetts over the last 20 years and came to the conclusion that homes sold after foreclosure sell at a particularly large discount of 27% on average. Further they find that “each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%”. Wow. I sure hope there haven’t been 100 foreclosures near you.

I’ve long believed that foreclosures DO NOT cause price declines, and after reading this study my view has NOT changed. My view instead is that price declines cause foreclosures, but there’s a twist to this view, that I believe threw these researchers off track and led them to a faulty conclusion despite an otherwise interesting paper. They are not alone. I think most people actually believe foreclosure cause prices declines. The key to the author’s error, I believe, can be found in the following sentence: “To the extent that house prices drive foreclosures, low prices should precede foreclosures rather than vice versa.” Through various regression tests they found this NOT to be the case, which would seem to strongly support their conclusion over mine.

Here’s the rub – home prices are a function of income and loan terms. As such the price buyers in a given area can afford to pay often declines PRIOR to being actually reflected in market sales. Massachusetts unemployment went from 6 to 9% in 1990, hitting many households and leaving them unable to pay their mortgages, and impacting what potential buyers could afford to pay as well. In 2007 over-indebted subprime borrowers with 100% LTV, teaser rate, neg-am, loans and no skin in the game began walking away as builders started discounting the same homes those borrowers were told would only go up in value. Those subprime defaults led lenders to pull the exotic loans that previously enabled buyers to “afford” twice as much home as they could using more traditional loan products. Sales then stalled as unforced sellers were unwilling or unable to drop prices.

This leads to the part that seems to confound everyone, including this study’s authors. Banks taking back foreclosures are forced to sell at the price buyers can afford. Thus foreclosures are the first sales to begin occurring in large numbers at the price level that buyers can now afford. As they do, nearby unforced sellers come to grips with the new market reality, while others that don’t have foreclosures nearby cling to the hope that their home won’t be affected. That hope is kept alive by a trickle of sales that continue to occur at prior price levels as not all buyers are impacted by economic changes equally.

Thus even though foreclosures are the first to sell at lower prices, they are not the CAUSE behind those lower prices.

I’ll leave you with this simple example: there was little decline in California’s median price, despite mounting foreclosures and an increasing percentage of foreclosures sales, until the September 2007 credit crisis. At that point the median price began to rapidly tumble to a level the median income family could afford using the more traditional loan products that remained available in the market. Bottom line, the typical homebuyer can only afford as much home as their banker tells them they can afford. As such changes in household incomes typically due to rising unemployement and/or the tightening of loan terms used to qualify buyers are what cause price declines, not foreclosures.

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Read our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Foreclosure filings where up in June after two months of decline
• Foreclosure cancellations reached a record high of 21,962 in June, up 27.09% from May
• The number of properties purchased by 3rd parties dropped by 23.73% since last month, but those properties bought were at the best margins in months
• Fewer properties went back to the bank, down 23.73% from the prior month
• Time-to-Foreclosure was flat month over month, but up 34.93% from June 2009
• Time-to-Resell continued it’s slow ascent, up 5.95% for the banks and up 4.29% for 3rd parties

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If you’re active at the auction you may have experienced the situation where you are the winning bidder only to be later notified by the lender or trustee that the sale will be rescinded and your purchase money returned, usually with no good explanation. If that hasn’t happened to you yet, it will. Don’t be dismayed; good things can happen if you stand up for your rights.

That’s just what happened to the investor who bought the home owned by Representative Laura Richardson (D – Long Beach) at trustee sale that was subsequently rescinded. The media made plenty of noise about the propriety of the cancellation in which a bipartisan panel unanimously found that she did not receive an improper gift or other benefit when Washington Mutual canceled the sale. But that’s another story. The important point here is what happened to the auction investor who bought the house at trustee sale for $388,000. When Washington Mutual rescinded the sale and returned the house to Rep. Richardson, the investor brought a claim against the bank and was rewarded with a $100,000 settlement for the effort. That enviable ROI likely reflected the strength of investor of the investors case that the lender had no legal grounds for rescinding the sale. Be aware that the alleged settlement in the Richardson matter was considerably larger than we typically see in this situation, but still illustrates the value of taking the time to make sure your rights aren’t being trampled when a lender makes a mistake or changes their mind after the sale.

If you find yourself in this situation, be sure to inquire about the reason the sale is being overturned, and don’t hesitate to question if that reason is sufficient, and hire counsel if necessary to protect your rights.

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In a recent paper, the New York Fed studies the likelihood of a continuing drop in homeownership. To address the question the authors propose that anyone who is underwater in their home should be considered a future renter:

“According to Haughwout, Peach and Tracy [the authors of the study], negative equity homeowners will face such daunting saving requirements to retain their home or purchase a new home that they will very likely convert to renters over time.”

See the study here: http://www.newyorkfed.org/newsevents/news/research/2010/rp100604.html

Bottom line: While the official government message is that underwater homeowners should do everything they can to hang in there, one could argue the New York Fed is already writing them off.

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Read our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Foreclosure filings, outcomes and inventories dropped across the board from April to May
• Foreclosure filings also declined substantially year-over-year, with NOD’s down 43.3% and NTS’s dropping 35.8%.
• Cancellations increased 141.3 percent over the prior year
• 3rd Party sales, typically investors, were up 75.4 percent over the prior year
• Time-to-Foreclosure rose 30.5% from May 2009

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Perhaps encouraged by the impact of government intervention on the foreclosure crisis our representatives in Sacramento have been busy with more foreclosure related legislation. Several changes are in the works.

• Extending borrowers protections from personal liability purchase money loans that have been refinanced (SB 1178)
• Delaying the start of the foreclosure process until after final determination of a loan modification request (SB 1275)
• Providing a way for borrows to be compensated if their home is sold at auction by the lender’s mistake (SB 1275)
• Delaying the start of the foreclosure process until the completion of mediation between the borrow and lender (AB 1639)

For those interested in the nitty gritty, here are the details.

SB 1178 will extend a borrows protection from a deficiency judgment pursuant to Code of Civil Procedure section 580b to refinanced purchase money loans

SB 1178 has passed muster in the Senate and is now awaiting discussion in the Assembly. The bill intends to amend Code of Civil Procedure section 580b that pertains to deficiency judgments to add the following language:

For purposes of this section, a loan used to pay all or part of the purchase price of real property or an estate for years shall include subsequent loans, mortgages, or deeds of trust that refinance or modify the original loan, but only to the extent that the subsequent loan was used to pay debt incurred to purchase the real property.

SEC. 2.   This act shall become operative on June 1, 2011, and shall apply only to actions filed after its operative date.

If enacted, the anti-deficiency protections afforded under Civil Code section 580 will be extended to borrowers who refinanced their original purchase money loan. The California Association of Realtors (C.A.R.) is the leading advocate for passage of the bill based on the equitable argument that to do so is fair because the substantive character of the debt, which was to buy the house, didn’t change just because the loan was refinanced in favor of different loan terms. In fact, C.A.R. says that not to extend the protection to refinanced loans would actually be unfair because consumers who refinanced purchase money mortgages were almost universally unaware that new personally liable was being acquired along with the refinance.

Opponents say that that SB 1178 simply perpetuates the same kind of excess borrowing behavior that contributed to the current conditions resulting in historic levels of negative equity. In addition, the bill will encourage strategic defaults by borrows who have the capacity to continue to make their mortgage payments.

We at ForeclosureRadar support this bill. We believe all mortgages should be non-recourse, even cash-out. Our reasoning is simple, homes should not be used as piggy-banks to pilfer, and lenders will be less likely to make cash-out loans if they can’t come after homeowners in the even of default. By making mortgages non-recourse lenders would be forced to more carefully consider the value of the property, and their ability to recover losses, which we believe is good for homeowners and lenders. That said we do believe there should be full recourse if the borrower commits fraud, or commits waste (damages the property).

SB 1275 will delay foreclosure until after final determination of loan modification and, further, will give a right of action against a servicer who sells a home at trustee sale in error.

SB 1275 has also passed the Senate and is now before the Assembly.  The principal purposes of the bill is to amend Civil Code Sections 2923.4 et seq to prohibit a loan servicer from commencing foreclosure until the homeowner has been given a final determination on their loan modification. The bill will also add Civil Code Section 2923.75 to provide damages through a private right of action against a loan servicer that sold a home at trustee sale in error, and in some instances allow rescission of the sale.

There is a lot to SB 1275 which is summarized as follows:

1. Applies, with one exception (see # 3, below) to mortgages and deeds of trust recorded prior to January 1, 2009, which are secured by single-family,owner-occupied, residential real property;

2. Requires the following before recording a Notice of Default:

a. A borrow must be given a specified notice concerning their foreclosure-related rights, and explaining foreclosure avoidance options;

b. A borrower must be given an application for a loan modification;

c. A borrowers written application for a loan modification or other alternative to foreclosure must be evaluated;

i. If the servicer determines that a borrower is not eligible for a loan modification, the servicer must send the borrower a timely denial explanation letter at least 15 days before the servicer records a NOD. The letter must contain several listed details including instructions on how the borrower may dispute the decision;

3. Requires the following concurrently with recording a Notice of Default regardless of whether the mortgage is secured by single-family or multi-family residential real property or commercial property:

a. Record a new document, called a Declaration of Compliance.  The Declaration of Compliance is a “check the box” document, which asks the servicer to identify which of several specific provisions of law apply to the loan, which of several specific provisions of law were followed in connection with the loan, and which of several specific options the borrower elected, with respect to requesting a loan modification.  The Declaration of Compliance must be signed by an individual having personal knowledge of the information it contains;

4.  Failure to record or recording a defective Declaration of Compliance is grounds for either monetary damages or voiding the foreclosure sale, depending on the entity to which the foreclosed home is sold at the foreclosure sale, as follows:

a. If taken back by the bank, the borrower may void the sale;

b.  If bought by a bona fide third party, the borrower can recover the greater of $10,000 or treble damages from the entity that failed to properly record a declaration;

5.  These requirements are exempted in cases where a borrower has already surrendered the property, has contracted with an organization or other entity that advises borrowers on how to “game” the foreclosure process, or has filed for a bankruptcy that is still before a court;

6.  Would sunset on January 1, 2013;

7.  Expands SB 1137 to include mortgages and deeds of trust recorded prior to January 1, 2009, which are secured by single-family, owner-occupied, residential real property;

8. Requires that concurrently with recording a Notice of Default on a loan that is subject to the requirements of SB 1137:

a. The borrower be mailed a separate letter, via certified mail, which includes the dates and times of, and addresses and telephone numbers used to contact (or to attempt to contact) the borrower, pursuant to the requirements of SB 1137.

According to it’s authors, the purpose of SB 1275 is to avoid unnecessary or mistaken foreclosures; encourage fair treatment of borrowers; provide greater transparency foreclosure modification decisions; and provide borrowers with a remedy against servicers who do not comply with the law.

As would be expected, there is some high profile opposition to SB 1275. A coalition of financial services and building industry trade groups, together with the California Chamber of Commerce, sent the Senators a joint letter of opposition.  “While we endeavor to understand the intricacies of this measure and its impact, we argue that the bill exemplifies an overly complicated formula that will be layered onto recently enacted borrower outreach efforts to further frustrate and prolong existing   foreclosure and loss mitigation efforts.”  The coalition further wrote that SB 1275 would add to the complexity of the loss mitigation process for servicers and create a series of procedural traps that will lead to ever-increasing litigation.

AB 1639 establishes mandatory mediation between the borrow and lender before foreclosure may commence.

AB 1639, if enacted, will amend California Civil Code section 2923.5 and add California Civil Code section 2946. This lengthy bill essentially establishes a facilitated Mortgage Workout Program  (MWP) for borrowers facing foreclosure whereby a borrower could request to participate in conciliation sessions (mediation) with their lender to examine mortgage loan modification options or foreclosure alternatives.

When introducing AB 1639, the authors acknowledged that the foreclosure solutions thus far have been largely unsuccessful. The voluntary programs implemented in the loan modification process that have required borrowers to trust their lenders to help them avoid foreclosure but have not established the necessary atmosphere of accountability and transparency.  The authors go on record to criticize The Home Affordable Modification Program (HAMP) saying, “the numbers are less than successful.” Pointing out that HAMP was designed to assist 3-4 million homeowners, yet after eighteen months of implementation, 1.3 million temporary modifications offers have been extended with only 170,000 made permanent.  Which suggests that the terms of the 1.3 million temporary offers may have been less than reasonable.

According to it’s proponents, AB 1639 is aimed to establish a foreclosure mediation process that will require lenders and borrowers to meet face to face with a neutral third party to work out a loan modification, or to determine if a modification is not appropriate and work out an exit from the home that is in everyone’s best interest.

In summary, AB 1639 is supposed to provide that a borrower who is delinquent on their mortgage or receives a notice of default can elect to participate in a foreclosure mediation program with their lender so they can arrive at a sustainable loan modification.  If the borrower is not able to mediate a modification it would allow the borrower and lender to work out a reasonable transition plan.  The thought is that homeowners will want to participate in mediation to better the chance to stay in their homes. Similarly, lenders and servicers have incentive to participate because the mediation session will demonstrate if a borrower qualifies for a modification program.

An itemized snapshot of AB 1639 follows:

1) With a notice of delinquency and notice of default the borrower is to be that a request to participate in the MWP may be made.

2) MWP applies to primary residences only.

3) Eligibility is limited to loans that originated prior to January 1, 2009, and for which the unpaid principal balance of the mortgage is no more than $729,750

4) There is no obligation to offer the MWP with either written evidence documenting a personal face-to-face meeting with the borrower for the purpose of discussing loan modification or foreclosure avoidance options; or written evidence documenting that the borrower has been offered a loan modification that would establish a ratio of the borrower’s housing-related debt to the borrower’s gross income (38% under certain listed combinations), or if the borrower has filed a petition for bankruptcy, and the proceedings have not been finalized.

5) The borrower has 30 days to request participation in the MWP.

6) Provides that if a borrower chooses to participate in the program prior to the filing of a notice of default (NOD) then the lender is not required to exercise other due diligence contact requirements as currently mandated under the law.

7) The borrower must complete an election form either via Internet Web site, email, telephone, or via mail service.

8 ) The program administrator shall implement rules and standards for the MWP, as specified and collect all require fees.

9) Within 10 days of requesting to participate in the MWP, the borrower shall submit specified documents to the program administrator.

10) Within 10 days of receiving notice that the borrower has elected to participate in the MWP, the lender shall likewise submit specified documents to the program administrator.

11) The foreclosure process is suspended during the time the borrower is participating in the program.

12) The lender shall deposit an administrative fee of $500 and a deposit of mediator’s fees of $600

13) Prohibits continuances of the MWP session(s) unless certain conditions are met.

14) Specifies that the lender may, but is not required to, agree on the terms of a loan modification.

15) A lender may offer or accept alternatives in writing to foreclosure, such as a short sale or deed-in-lieu of foreclosure, but only if the borrower requests these alternatives, rejects a loan modification, or does not qualify for a loan modification

16) If a borrower fails to meaningfully participate in the MWP, the program shall be suspended, unless the borrower cures noncompliance within 10 days.

17) If a lender fails to meaningfully participate, foreclosure actions shall be suspended until such time that the lender cures noncompliance.

18) The administrator reports quarterly to the Legislature regarding the performance of the MWP.

19) A lender participating in the MWP shall post public data reports on a quarterly basis on its Internet Web site

20) The conciliation officer shall use all reasonable efforts to ensure that each MWP session is completed within 60 calendar days of the appointment.

21) The conciliation officer is to issue a report to the Administrator upon completion of the conciliation that shall state whether the parties reached a mutually acceptable resolution.

22) The act becomes operative upon issuance of a notice to the Governor by the Administrator declaring that the Administrator has the capacity to make the program available to any borrower wishing to participate in every county of the state.

23) The bill is contingent upon receipt of federal funding.

24) The bill shall sunset on January 1, 2014.

Even if this program can be set up to cover all borrows everywhere and even if federal funds are received, one can’t help but wonder whether this mediation process will really help. The borrower and lender will lack sufficient motivation to make a deal if not pressed by an approaching trustee sale date. The mediation process has long been used to resolve civil litigation matters short of trial and those mediations are always more effective if there is fear of a set trial date looming in the background. The fear of a set trustee sale may be a critical component to a successful mediation program and that is lacking in AB 1639. If it works, that’s great. But one thing for sure, AB 1639 will be another contributor to foreclosure process delays.

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Most people now know that lenders can’t come after borrowers for losses on purchase money loans. Unfortunately many folks lost that protection when they refinanced as the law, Civil Code of Procedure 580b, only applied to the original loan. Senate bill 1178 intends to fix that by extending 580b, the “purchase money rule” to any refinance of that original amount. Note that the protection would still NOT extend to owners that did cash-out refinances, and that makes sense. The whole idea behind the purchase money rule is that the borrower would not have been able to buy the home without the lender, that lenders are more sophisticated than borrowers, and therefore lenders should bear the risk if they make too large a loan for a given property… basically eliminating the lenders ability to come after the borrower personally should the borrower default, and there not be enough value left in the property to cover the loan.

With the likely enactment of SB 1178 right around the corner, it seems a good time to revisit the issue of whether the lender on a purchase money 2^nd deed of trust can go after a borrower when the lender on the 1^st deed of trust forecloses “wipes out” the 2^nd deed of trust. The answer is “No” and an enactment of SB 1178 amending CCP section 580b does not change that. On the contrary, SB 1178 will broaden the borrowers protection.

To begin, the California Supreme Court decided in Brown v. Jensen (1953) 41 Cal 2d 193 that CCP section 580b applies to a junior purchase money mortgage when the security has been rendered valueless by the foreclosure of a senior mortgage. In Brown v. Jensen the defendants bought their home from the plaintiff with purchase money borrowed from Glendale Federal Savings & Loan secured by a 1^st Deed of Trust and plaintiff carried back a portion of the purchase price secured by a 2^nd Deed of Trust. Glendale foreclosed and the property went back to Glendale at trustee sale for the opening bid. The trustee’s deed was recorded in favor of Glendale and the 2^nd Deed of Trust held by plaintiff was wiped out.

Plaintiff unsuccessfully argued that security on the debt  (the second trust deed) had become valueless because it had become exhausted by the sale under the first trust deed so she was not limited by the “one action rule” of California Code of Civil Procedure section 726. In denying the plaintiff relief the Court asked the question; did plaintiff take a purchase money trust deed on the property when it was purchased? If she did, then Civil Code section 580b was applicable and she could look only to the security because by taking such a trust deed she knew the value of his security and assumed the risk that it may become inadequate. The Court pointed out that the rationale was especially true when the lender knowingly takes on a 2^nd deed of trust, which has a greater risk that the security could become insufficient.

SB 1178 serves to broaden 580b with the following “new and improved” additional language:

“For purposes of this section, a loan used to pay all or part of the purchase price of real property or an estate for years shall include subsequent loans, mortgages, or deeds of trust that refinance or modify the original loan, but only to the extent that the subsequent loan was used to pay debt incurred to purchase the real property. (Emphasis added.)”

So SB 1178 applies to the refinance of “a loan” used to purchase the property, regardless of whether the loan has senior or junior status, most commonly a 1^st deed of trust and a 2^nd deed of trust. Assuming the law is enacted in similar form as is now being considered in Sacramento, folks can feel comfortable that they are not exposing themselves to personal liability by refinancing any or all of their purchase money loans, regardless of the loan’s seniority.

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Read our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Foreclosure filings were down in April for the first time since the beginning of the year.
• Despite the decline in filings, the inventory of properties in preforeclosure or scheduled for sale only dipped slightly as the drop in filings were offset by an increase in the time to foreclose.
• Cancellations continue to climb, up more than 32 percent from the beginning of the year.
• The number of properties sold to 3rd parties also continues to climb, helped again this month by slightly better discounts.

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