After a series of failed attempts to help homeowners in foreclosure, California lawmakers are now proposing a state-mandated mortgage mediation program. Will this provide needed relief for struggling borrowers or just throw lenders another pothole and slow down the recovery?
Assembly Bill 1639 passed committee and will head to the California State Assembly floor this week. If this bill becomes law, it would establish the Facilitated Mortgage Training (FMW) that would require lenders to meet with borrowers to develop a modification plan before they can proceed with foreclosure.
Basic eligibility for the program is as follows:
1. The property must be an owner-occupied principal residence.
2. The loan must be a 1st mortgage originated before January 1, 2009.
3. The unpaid principal balance cannot be greater than $729,650.
4. The law does not apply if the borrower has already been offered a loan modification that would reduce the borrower’s home-related debt to 38% or less of the borrower’s gross income.
It all sounds good so far, but, as with other foreclosure prevention programs, the problem is in the details.
Although the law would “require” lenders to meet with borrowers before proceeding with foreclosure, the burden of starting the program falls entirely on the borrower’s shoulders (the program does not start automatically). The borrower must take substantial steps to activate the program. The lender must give notice of the program in the Notice of Default (the filing of this “NOD” initiates the foreclosure legal process). This is where the problem starts. Most borrowers simply ignore the Notice of Default because they feel overwhelmed once the foreclosure officially begins. As required by statute, borrowers receive about a dozen copies of the NOD at one time (some certified mail, some regular mail, and some mailed home). I have personally seen borrowers simply collect all mail from the lender, including the NOD, and put it all in a drawer, unopened.
In addition, even if the borrower opens the NOD, the notice of the mediation program will be hidden behind several pages of recently enacted statutory disclosures. Borrowers may never find out about the new mandatory program and will most likely miss the 30-day window to opt-in, even if they find the notices.
If the borrower actually receives and reads the notice and then wishes to participate in the mediation program, the borrower must complete a form (yet to be determined) and return it to the program administrator within 30 calendar days of receipt of the notice. default In addition, the borrower will be required to provide “other information” within 15 days of applying for participation (tax returns, income verification, a “specified funds deposit” and a hardship letter).
The biggest blow to this program is the requirement that borrowers deposit 50% of your current mortgage payment each month with the servicer while the borrower negotiates the modification. Of course, those payments go to the lender if a loan modification fails, which happens more than 60% of the time. We’ve already seen that most loan modification programs simply don’t work. For loan modalities, there is a narrow window between the initial DTI analysis and the net present value test. If the numbers don’t match, the program fails. Therefore, the borrower has to come out of pocket to get into a program that has already proven to fail more than 60% of the time. Not good.
As for the “required” in-person meeting touted in the bill, that meeting only occurs after the borrower has opted into the program, complied with all obligations under the law, and deposited 50 % of the mortgage payment with the administrator. .
There are good things about the show that should be noted. This bill has some teeth to slow down the foreclosure process and give the borrower a chance to really think through the options (including negotiating a short sale or possibly a “planned foreclosure” with a cash out for keys). . There is also strong language that requires the lender to suspend the foreclosure process while the borrower is negotiating in the program. The bill requires the involvement of an outside “conciliation officer,” which could give the lender some perspective on the situation. Finally, there are strict guidelines for getting a response from the lender.
Aside from these important points, it’s hard to be optimistic that this program will help many homeowners. Previous foreclosure moratorium and loan modification programs (both state and federal) have been utter failures. First, we had the California Foreclosure Reform Act (Senate Bill 1137), which “added” a 30-day period before the NOD could be filed. The word aggregate is in quotes because lenders typically wait around 90 or 120 days after the borrower is in default before filing for foreclosure, so the borrower is not really given any additional time. This was meaningless legislation. Then, the California Foreclosure Prevention Act (ABX2 7 and SBX2 7) added an additional 90-day period between the NOD filing and the Trustee’s Notice of Sale (this “NTS” establishes the actual foreclosure auction date home mortgage). However, that law provided an exemption that my 3-year-old daughter could find. Therefore, essentially no lender is subject to the additional 90-day period. This was also nonsensical legislation. Finally, we all know about the continued failure of Treasury’s much publicized HAMP modification program.
For all its good intentions, Assembly Bill 1639 appears to be more of the same: Nonsense legislation.