The California Foreclosure Prevention Act

The California Foreclosure Prevention Act, or Assembly Bill X2.7 was signed by Governor Arnold Schwartzenegger in February and took effect on June 15th, 2009. Under the new Act foreclosing on certain loans are prohibited from giving a notice of sale until the lapse of at least 3 months plus 90 days after the filing of the notice of default. A loan servicer can obtain an exemption from this requirement by demonstrating that it has a comprehensive loan modification program.

What is the purpose of this law?

The purpose of this law is to try to stem the tide of foreclosures and their adverse consequences by providing additional time for lenders to work out loan modifications with borrowers as well as creating an incentive for lenders to establish comprehensive loan modification programs.

When will this law be in effect?

This bill, which was enacted into law on February 20, 2009 along with the state budget, will go into effect 90 days there after which will be on or about May 22, 2009. The appropriate commissioners must adopt regulations to carry out this law no more than 10 days after the date this law takes effect. The law becomes operative 14 days after the issuance of such regulations.

This law will stay in effect only until January 1, 2011 at which time it will be repealed, unless it is deleted or extended by statute.

How does this new law affect the foreclosure timeline?

Under preexisting law, a lender who files a notice of default in the foreclosure process must wait at least 3 months before giving a notice of sale. The new law extends that 3-month period by an additional 90 days.

Also under preexisting law, the general rule of thumb is that the entire foreclosure process takes a minimum of 4 months from the filing of a notice of default until the final trustee’s sale. Under the new law, that general rule of thumb is extended by 90 more days for a total of about 7 months, unless the lender is exempt. For more information about the foreclosure process, C.A.R. offers a legal article entitled Foreclosure Timeline.

Under the new law, is the minimum time frame from the filing of a notice of default to the notice of sale a total of 6 months or 180 days?

Neither. The way the law is written, the minimum time frame from the filing of the notice of default to the notice of sale is technically “3 months plus 90 days.”

What type of loan falls under the new law extending the foreclosure process by 90 days?

Unless otherwise exempt, the 90-day extension to the foreclosure process applies to loans that meet all of the following requirements:

• The loan was recorded from January 1, 2003 to January 1, 2008, inclusive;

• The loan is secured by a first deed of trust for residential real property;

• The borrower occupied the property as a principal residence at the time the loan became delinquent; and

• A notice of default has been recorded on the property.

What are the exceptions to the new law extending the foreclosure process by 90 days?

Most notably, a loan servicer is exempt from the 90-day extension to the foreclosure process if the loan servicer has obtained an order of exemption based on the implementation of a comprehensive loan modification program)).
Other exceptions to the 90-day extension include the following:

• Certain state or local public housing agency loans.

• When a borrower has surrendered the property as evidenced by a letter confirming the surrender or delivery of the keys to the property to the lender or authorized agent.

• When a borrower has contracted with any person or entity whose primary business is advising people who have decided to leave their homes on how to extend the foreclosure process and avoid their contractual obligations to the lenders.

• When a borrower has filed a bankruptcy case and the court has not entered an order closing or dismissing the case or granting relief from a stay of foreclosure.

What constitutes a comprehensive loan modification program?

A comprehensive loan modification program that may exempt the loan servicer from the 90-day extension to the foreclosure process includes all of the following features:

• The loan modification program is intended to keep borrowers whose principal residences are located in California in those homes when the anticipated recovery under loan modification exceeds the anticipated recovery through foreclosure on a net present value basis.

• It targets a 38 percent or less ratio of the borrower’s housing-related debt to the borrower’s gross income. Housing-related debt is debt that includes loan principal, interest, property taxes, hazard insurance, flood insurance, mortgage insurance and homeowner association fees.

• It includes some combination of loan modifications terms as specified.

• The loan servicer seeks long-term sustainability for the borrower.

What are the loan modification terms that must be included in a comprehensive loan modification program?

A comprehensive loan modification program that may qualify for exemption from the new law extending the foreclosure process by 90 days must include some combination of the following features:

• An interest rate reduction, as needed, for a fixed term of at least five years;

• An extension of the amortization period for the loan term to no more than 40 years from the original date of the loan;

• Deferral of some portion of the unpaid principal balance until loan maturity;

• Principal reduction;

• Compliance with a federally mandated loan modification program; or

• Other factors that the appropriate commissioner determines.



Does a loan servicer have to modify loans to get an exemption from the 90 day extension to the foreclosure process?

No. A loan servicer is not required to modify a loan for a borrower who is not willing or able to pay under the modification. Furthermore, a loan servicer is not required to violate any contractor agreement for investor-owned loans.

How does a loan servicer obtain an order of exemption from the new law extending the foreclosure process by 90 days?

A loan servicer may apply to the appropriate commissioner for an order exempting loans that it services from the new law extending the foreclosure process by 90 days. Upon receipt of an initial application for exemption, the commissioner must issue a temporary order exempting the mortgage loan servicer from the 90-day extension to the foreclosure process. Within 30 days of receipt of the application, the commissioner must make a final determination by issuing a final order exempting the loan servicer or denying the application. If the application is denied, the temporary order of exemption shall expire 30 days after the date of denial.

To which commissioner does a loan servicer apply for exemption?

A lender or loan servicer would apply for an exemption to the following commissioner as appropriate:

• Commissioner of the Department of Financial Institutions for commercial and industrial banks, savings associations, and credit unions organized in California to service mortgage loans;

• Commissioner of the Department of Real Estate for licensed real estate brokers servicing mortgage loans; and

• Commissioner of the Department of Corporations for licensed residential mortgage lenders and servicers, licensed finance lenders and brokers, and any other entities servicing mortgage loans not regulated by the Department of Financial Institutions or Department of Real Estate.


How does a homeowner ascertain whether his or her loan servicer is exempt from the 90-day extension to the foreclosure process?

The Secretary of Business, Transportation and Housing must maintain a publicly-available Internet website disclosing the final orders granting exemptions, the date of each order, and a link to Internet websites describing the loan modification programs.

Does a loan servicer have to inform the borrower as to whether the loan servicer is exempt from the longer foreclosure timeframe?

Yes. A notice of sale must include a declaration from the loan servicer stating both of the following:

• Whether the loan servicer has obtained a final or temporary order of exemption from the 90-day extension to the foreclosure process that is current and valid on the date the notice of sale is filed; and

• Whether the 90-day extension to the foreclosure process under the new law does not apply.

The law requires the loan servicer’s declaration of exemption on the notice of sale, even though it may have been more helpful for the borrower if the declaration was on the notice of default. This requirement will stay in effect only until January 1, 2011 at which time it will be repealed, unless it is deleted or extended by statute.

What is the penalty for violating this law?

Anyone who violates this law shall be deemed to have violated his or her license law as it relates to these provisions.

How can I learn more about this?

http://www.brentsellshomes.com

Short Sales

Contrary to it’s name, a short sale is anything but short. There are a lot of reasons which I will discuss in a bit, but I think one word sums it up and that is “confusion.” During a short sale, the lender forgives a part of the loan to the owner (seller) usually due to the fact that the owner (seller) is underwater on the property and can’t afford or doesn’t want to live in property anymore. Now this is where it gets interesting. Just to arrive at the decision of a short sale probably took months for the bank to approve. During this approval process, the months the owner is behind on the mortgage has grown and foreclosure is now well within the rights of the bank. The next question is how long does the owner get for debt forgiveness before the bank decides to foreclose on the property as the months keep ticking away. And ticking is exactly what is happening before the bank decides to foreclose. Oh, and there is still one more question to be answered by the bank during this short sale period which is how much debt to forgive?

Now, enters the buyer. The buyer has identified a ticking short sale which could be foreclosed upon at any time. The buyer makes a offer which the owner has to run by the bank to determine how much debt forgiveness there is going to be. Trying to get a answer from the bank about a offer in hand is about as easy as going to the DMV to get something handled. The banks aren’t set up to analyze a offer, know the value of the property they have on the books, and have a internal point person to move the transaction along. So we wait, and wait, and wait, and...you get the idea.

Finally there is a answer. It has been decided that the bank is still considering the offer, however before they can proceed, they need to the buyer to do a couple more things. First the bank wants the buyer to get qualified through them. Then they want the buyer to fix some things have become a problem on the distressed property. It goes something like this. “We are still considering your offer, however you need to fix the leak in the pool put in a new hot water heater and change the garage from a converted living space back to a garage.” (Because Fanny and Freddie wont fund until those conditions are met.)

The buyer has waited 3 or 4 weeks to find out that the bank wants them to fix some things on the property before the close of escrow and there is still no decision on the price. And remember the time is ticking away bringing the property that much closer to foreclosure. Absolultely crazy you say. I would have to agree.

Lets say the property goes into foreclosure because the powers that be are too ill equiped to handle the short sale and more time and hence more debt has been incurred. Now the bank knows exactly what it has to do to sell the property. So it sends it’s people out to get the heaters fixed and the garages to be converted. The bank then picks from it’s list of qualified realtors and the house is put on the market. Time goes by and a new buyer is found. Heck, it might even be the joe buyer who originally tried to buy the property. Now the realtor and the bank are looking at the offer and can you believe it? A decision is made to either accept the offer or counter it. The process moves right along and boom, buyer and bank are in contract. 30 to 60 days after that the bank no longer owns the home and joe buyer or should I say joe investor will be up 20 to 40 percent in 2 or 3 years.

Foreclosures, Foreclosures, Foreclosures

April saw a definite uptick in the purchase of foreclosures. It used to be you would present a offer on a foreclosure and you were the first and only offer in months. That is no longer the case. In “hot” foreclosure areas, sales were up, multiple offers were up and so were the prices. The median price for Santa Clara County was $390,000 for March 2009. April 2009’s median price was $435,000. 43% of the 1,171 single family homes sold were foreclosure re-sales.

Lets keep in mind that March 2008 had a median price of $620,000 for Santa Clara County. Last year there were more sales of high end homes. We are in a different market right now with investors and first time home buyers looking for great deals. This is a good first sign that the market is improving.

Is the Economy Getting Better?

There are always differing opinions about the economy. One thing for sure is that the decline is slowing and there are some signs of steadiness.

The big problem is the banks. There is a lot of confusion about their strength, viability, and survivability. The bottom line in how this affects real estate is that it is still hard to get loans for consumers and even harder to get a small business loan.

Recovery for the banks is based upon a 2 prong approach:

1. 1. Get enough capital into the largest 19 banks to ensure their viability. This will take the form of loans by the federal government for preferred shares of stock of the bank. How much the banks need was determined by the recent stress tests.
   

2. 2.Get toxic assets off of the banks’ balance sheets via setting up an aggressor bank. This aggressor bank will consist of funds from the federal government as well as private equity investors.
   

For now, the FDIC is insuring the bank debt until the above programs are in place and operational.

The government has many plans for main street:

1. 1. The government will put 1 trillion dollars more in TALF to open up the credit markets for auto and credit card loans.
   

2. 2.The government will increase the number of loans they buy from Frannie and Freddie from 600 billion to 1.25 trillion. This has opened up the market considerably for first time home buyers in California.
   

3. 3. Start the program to help foreclosures by modifying some loans and/or refinance existing debt under more favorable terms.
   

4. 4.The government will buy 300 billion long-term US treasuries to bring interest rates down on T-Bills which have a correlation with mortgage interest rates.
   

5. 5. The stimulus package
   

Lets talk about the current state of the economy in terms of pros and cons.

Pros:

1. 1. The stock market is doing better having gone from 6547 to 8547.
   

2. 2.The credit markets are starting to open up.
   

3. 3.Banks have said they are profitable again in the first months of 2009.
   

4. 4.Oil is trading relatively low.
   

5. 5.New home sales were up 22%.
   

Cons:

1. 1. The unemployment rate is realistically at 12 or 13%, not at the 8.6% stated.
   

2. 2.The stock market could take one more beating before year end.
   

3. 3.The government budget for 2009 is BIG.
   

4. 4.The government may want to over-regulate Wall Street.
   

5. 5.The value of the dollar is being stressed again as the government continues to build up debt. Look for inflation as a result in 2011.
   

6. 6.Consumers have lost wealth and as a result are not spending as much. It has been estimated that 11 trillion dollars in consumer wealth as evaporated.
   

In conclusion we will get through this. Look for light at the end of the tunnel in the 2010/2011 time frame. We have had recessions before in which the the norm was every 4 years. Now with federal engineering these recessions are about every 8 years. In the end, less risk, less leverage, more saving, and less reckless spending is a good prescription for us all.