Commentary
Clearly, our legislators didn't set out with the intent to delay the housing recovery and trap homeowners inside the 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 are dealing with the real problem at the moment... eliminating the trillions in unsustainable mortgage debt that were 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 drags 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 than 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 similar 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 recidivism rates on the loan mods (folks who stop making payments after the loan mod) - there is ZERO doubt at this point that payment-based loan mods have failed. While this law, leaves open the possibility of principal 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 altogether different to reduce principal, and then continue to receive a 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 to 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?
