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New State Law Delays Foreclosures An Extra 90 Days…Well, Kinda-Sorta

March 2nd, 2009 categories: Foreclosures / Short Sales, The Economy

If you read details of California’s recently approved state budget, you probably saw mention of a 90-day moratorium on foreclosures that was attached to the approved budget.pull-quote1

Already, though, there’s been a lot of confusion and uncertainty about what the new state Foreclosure Prevention Act really does and doesn’t do. It’s being hailed as everything from the state’s foreclosure prevention end-all to nothing more than nine pages of meaningless, toothless legalese.

In its simplest terms, the budget amendment, authored by Senator Ellen Corbett (D-San Leandro) essentially extends the foreclosure sale date an extra 90 days to allow borrowers additional time to hopefully work out an alternative with their lenders.

The new law doesn’t cover every loan in foreclosure. Here are some of the key provisions:

  • It only applies to loans taken out between Jan. 1, 2003 and Jan. 1, 2008.
  • It only applies to a First mortgage.
  • It only applies to loans on the borrower’s principal residence.
  • The three-month extension expires on Jan. 1, 2011

Under the existing law, the foreclosure “clock” starts once the lender files a Notice of Default. The borrower then has three months to bring the loan current; otherwise, the lender can hold a Trustee’s Sale and foreclose three weeks later.  (Trustee’s Sales are what you see in  legal notice sections of local newspapers.)

Well, the new law will now require that lenders allow an Extra 90 Days between the Notice Of Default and Notice of Trustee’s Sale. So a foreclosure that previously could have occurred in just under four months will now take seven months.

Since the new law doesn’t apply to investor-owned foreclosures nor on second mortgages/equity lines, foreclosure time periods on those defaulted loans will continue under the existing rules, with no additional waiting period.

So if you’re currently in default on an loan that meets the new criteria, does this mean you automatically get an extra three-month reprieve? And, does it mean California will see far fewer foreclosures in the coming months?

Well, maybe yes and maybe no.

You see, the new law definitely has some strings attached.

For one, lenders can file for an exemption from the new law as long as they have a loan modification program in place that contains certain minimum provisions. If they’re granted an exemption, they continue under the existing rules.

Look at the law’s requirements closely and you’ll see that it’s fairly easy for a lender to create a loan-mod program which qualifies for the exemption but offers little help to a distressed borrower.

For example, a lender who reduces the borrower’s loan balance by a mere $1,000 might qualify for an exemption. So might a lender who simply increases the loan term from 30 years to 31 years. As would a lender who agrees to defer only $1,ooo on a $350,000 loan.

In other words, there are plenty of loopholes that could permit lenders who really have no desire to modify a loan to devise a loan-mod program that really won’t offer hardship borrowers any meaningful relief.

Yet, as long as the program meets the state’s guidelines and gets its exemption, the lender would be able proceed with foreclosures without having to wait that extra three months.

I read one report recently where the author of the bill admitted that she would have liked to have put more “teeth” into the bill, but said that such efforts were hampered by federal banking regulations.

The new law has provisions that on the surface look like they’ll hold lenders accountable if their exempted loan-mod programs don’t actually provide tangible help to “upside-down” borrowers.

The legislature is supposed to receive regular updates on how many loans have actually been modified by those lenders who are exempted from the new law. And that information is also supposed to appear on a new web site, so the public can also see whether lenders really are making good on their promises to help their hardship borrowers avoid foreclosure.

With most bills, by the time they’re signed into law, they’ve been negotiated, compromised and watered down to where they kinda-sorta address something akin to the author of the bill’s original intent.

That seems to be the case with the new Foreclosure Prevention Act. Whether it actually makes a tangible impact in the number of foreclosures remains to be seen.

Time will tell.

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This entry was posted on Monday, March 2nd, 2009 at 8:31 pm and is filed under Foreclosures / Short Sales, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  1. New State Law Delays Foreclosures an Extra 90 Days | Joe Gross - The National Mortgage Expert said at March 3rd, 2009 at 8:09 pm

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