State of California to delay housing recovery and trap homeowners in a prison of debt

By February 25, 2009California, States

Clearly our legislators didn’t set out with the intent to delay the housing recovery and trap homeowners inside prison of debt, but that is the likely outcome of the “California Foreclosure Prevention Act” that was signed into law last Friday.

This law imposes an additional 90-day delay on the filing of a Notice of Trustee Sale unless the lender gets an exemption by implementing a loan modification program that meets the state’s requirements. You’d think that after the complete failure of SB1137 to do anything but delay the inevitable, the legislature would have learned that incentivizing loan mods through changes to the foreclosure process doesn’t work and would instead spend their time and energy focusing on things that might actually help.

To be fair the state has a pretty limited toolbox for addressing the foreclosure “problem”. Lenders are by and large regulated at the federal level leaving California fairly impotent in forcing these institutions to do anything. The one thing they do control is the foreclosure process. Which explains their attempt to use that process to try and force concessions from the banks.

The problem there is that the concession they are seeking will do NOTHING to help solve the housing crisis. In fact it may make it worse!

Arguably, foreclosure is actually one of the few mechanisms that IS dealing with the real problem at the moment… eliminating the trillions in unsustainable mortgage debt that was taken on nationwide during the bubble years. By delaying foreclosures we only delay the elimination of this debt and the return to a healthy housing market.

Sure, it would be better to keep people in their homes through loan modification. But unless those modifications reduce principal balances below current market value, homeowners will stay trapped inside this prison of debt, unable to sell when necessary which delays the inevitable foreclosure, and dragging the recovery out for years.

Given the circumstances of real life including job loss, divorce, death, disease, relocation, etc., most people facing foreclosure will have to sell at some point – and foreclosure will remain their only option.

In my opinion, most homeowners would be better served by taking the hit now and letting their home go to foreclosure then to enter one of these “affordable payment” focused loan mods. With foreclosures now having an average of $180,000 in negative equity in California, they are likely to recover from the hit to their credit far sooner than their home equity recovers.

Evidence that this plan is failing, which is similiar to Sheila Bair’s portion of Obama’s housing plan, can be seen at Bair’s test case – Indymac bank. Indymac has aggressively implemented this type of foreclosure modification plan, and their number of foreclosures has actually risen. Whether it is because homeowners simply can’t qualify for the modification, or they are choosing not to imprison themselves in debt isn’t known. But between the rising foreclosure rates, and the high recitivism rates on the loan mods (folks who stop making payments after the loan mod) – their is ZERO doubt at this point that payment based loan mods have failed.

While this law,  leaves open the possibility of prinicipal balance reductions, as does Obama’s plan, it is very unlikely we see lenders take this approach voluntarily. It is one thing to take the loss in principal at foreclosure as you at least recover your cash – it is all together different to reduce principal, and then conitnue to receive low interest on a loan where your borrower has already defaulted once.

Let’s stop kidding ourselves – this simply won’t happen until we point a gun to their heads, have taxpayers pay the difference, or nationalize them.

If we want to get this economy back on track we will have eliminate the crushing and unsupportable housing debt that was taken on during the bubble years – regardless of who fault it was. Playing games with the foreclosure laws in the vague hope of getting lenders to do something they simply won’t do only delays the road to recovery.

That’s my take. What do you think?

No Comments

  • Sean says:

    Spoke about this topic tonight on KCRA Channel 3 in Sacramento. You can watch the appearance here:

  • Marie Pham says:

    I like your comment.  I think we’ll be seeing a lot of bankrupcies, if the bill of stripping the junior liens passes from the Senate.  The Judges will have the power to strip the junior liens and modify the loans.  Obviously Lenders are not in support of this Bill.  If this bill passes, future buyers will see interest rate rises as high as 11 or 13 percent in the late 80’s.  There is no perfect way to fix this problem.  

  • Sean says:

    Hi Marie,


    Thanks for commenting. Personally I seriously doubt we will see interest rates rise to those levels solely as a result of bk cram downs. Two things to keep in mind:


    1. They are only being crammed down because they made loans at idiotic valuations that were never supported by incomes in those areas.


    2. With interest rates on things like treasuries as low as they are, and an aging population desparate for fixed income their will be plenty of competition to make loans at reasonable valuations as the risk of loss is low once home values are supportable on incomes in the area.

  • Some banks are offering a pricipal reduction to help keep homeowners from foreclosures.  What they are not clear about is that they take that amount reduced from the balance and add it back to the loan amount at the end of the term or when the consumer sells or refinance their home and loan.

  • SEO SERVICES says:

    This will be happening more and more as people can’t afford their
    skyrocketing mortgages and bail. They’ll do anything to get a nice
    house with a size and mortgage they can manage. I’m sure hundreds, if
    not thousands of others have done it as well, but they just won’t

    I am very concerned about the economy as a whole getting.

    I am also very,
    very surprised that goverment taking a very little steps to overcome the problems.

  • Marie Pham says:

    There are sellers out there buying REOs for cash at  a low price and after they move into the new home they let their primary residence be foreclosed.  Banks are aware of this schemes so they don’t lend out to homeowners with a current mortgage, that has no equity, they don’t believe that the homeowners will rent out the properties.  The three large banks are not making purchase loans on this type of clients even if the clients have a fico of 800, and  qualified income, the lenders know that the homeowners are willing to have their credit ruined , they will have their properties foreclosed after they get a better, lower priced homes to replace their primary homes.  

  • […] On November 26, 2012, ForeclosureRadar recorded its millionth California foreclosure sale since January 2007. While we acknowledge that foreclosures are painful and unpleasant, this milestone also means a million underwater homeowners have escaped a prison of debt. […]

  • […] On November 26, 2012, ForeclosureRadar recorded its millionth California foreclosure sale since January 2007. While we acknowledge that foreclosures are painful and unpleasant, this milestone also means a million underwater homeowners have escaped a prison of debt. […]