California Mortgage News

In the wake of the subprime mortgage debacle, the California legislature passed a flurry of bills, most aimed at controlling the practices of California mortgage lenders and realtors.

Assembly bill 69 requires California mortgage lenders to file a detailed report whenever a loan is modified.

Assembly bill 180 requires foreclosure consultants to beregistered and bonded, and prohibits a consultant from attempting to assist an owner after the trustee's sale of the home is conducted.

Senate bills 870 and 1065 give California mortgage lenders the ability to work through the California Housing Finance Agency to help residents refinance at-risk mortgages.

Senate bill 1055 allows those who have had mortgage debt forgiven to exclude that forgiven debt from taxation by the state.

One of the most sweeping pieces of legislation affecting California mortgage lenders is Senate bill 1137. This bill requires mortgage lenders to contact homeowners at least 30 days before initiating the foreclosure process, and to meet with the homeowners to explore restructuring options.

Assembly bill 929 increases the amount of "affordable housing" in California by raising the total debt that the California Housing Finance Agency can carry by some $2 billion.

Senate bill 223 makes it a criminal offense for appraisers to engage in any appraisal activity that is connected to purchase, sale, transfer, financing or development of a property if the compensation to the appraiser is affected by the final price generated by the appraiser.

These are just some of the highlights of recently passed legislation; there's far more where this came from.

The question is whether any of this legislation will have an effect on foreclosures. According to ForeclosureRadar, 16,352 notices of mortgage default were filed in September of 2008, which was a decrease of 36.4% from the same period a year earlier. Still, the number of properties taken to sale at auction increased 163.2% over the prior year, and lenders took 95% of the properties taken back to auction.

These numbers suggest that, despite the good intentions of the legislature, the bills may have little or no impact on the number of foreclosures in the state.

“Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions, or extending the unsustainable teaser rates that created the foreclosure crisis in the first place,” said Sean O'Toole of ForeclosureRadar.

“Wide scale adoption of large principal balance reductions also pose significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default, and/or foreclosure activity in the future, a consequence clearly not intended.”

While it's still not clear what effect the legislation will have on consumers, lenders and the foreclosure rate, the regulatory measures passed will likely drive most of the shady loan practitioners out of the market. Similar legislation is now being proposed for Florida mortgage lenders, and lenders in other states.