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California bill ending 'dual track' foreclosures faces key vote

May 7th, 2011 9:24 AM by Lehel S.

California bill ending 'dual track' foreclosures faces key vote

Pursuing foreclosure even if a borrower has sought a loan modification has faced criticism. The Senate measure would require a lender to fully evaluate a homeowner for a loan modification first.

A proposed law facing a key vote in Sacramento on Wednesday would require lenders in California to make a decision on mortgage modifications for delinquent homeowners before beginning the repossession process, in effect ending "dual track" foreclosures in the state.

Financial institutions commonly pursue foreclosure even if a borrower has requested a loan modification, a two-track process the lending industry has argued is necessary to protect its investments. But dual tracking is under fire from regulators and lawmakers in the wake of last year's "robo-signing" scandal, which revealed widespread foreclosure errors.

The California Homeowner Protection Act, authored by state Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Sen. Mark Leno (D-San Francisco), is one of the furthest-reaching efforts to limit the practice. Several other states have passed requirements for third-party groups to oversee mediations between mortgage servicers and homeowners.

The California bill, SB 729, would require a lender to fully evaluate a borrower for a loan modification before filing a notice of default, the first stage in the formal repossession process, and a significant change in the way foreclosures are conducted in the Golden State.

The law would give delinquent homeowners the right to sue their lenders to stop foreclosures if they believe the requirement to properly evaluate their loan modification requests had not been followed. If the sale occurs without the proper evaluation, homeowners would also be given the right to sue for damages or to void a foreclosure sale for up to a year after the sale.

Such a change is necessary in the state because the two-track process often leads to unintended foreclosures by mortgage servicers that "don't know what they are doing" and often bungle the loan modification process, Leno said in an interview.

"We know of folks not only entering the loan modification process, but folks who have already been accepted, and are making timely loan modification payments, and then getting a knock on their door and being told 'your home will be sold,'" Leno said. "The stories are many and horrifying."

Groups representing lenders said the legislation overreaches and would only inhibit the state housing market's recovery by slowing down an already drawn out foreclosure timeline. California's comparatively streamlined foreclosure system, which allows for a home to be taken back without a court order, has helped the state work through a foreclosure glut relatively quickly and recover faster than other hard-hit states.

"It is just not good for the housing market, which is not good for the state economy, especially when we are at 12% unemployment," said Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn. "It is a reaction, an overreaction, to procedural mistakes," he continued, "and this doesn't really get at solving any of those problems."

The bill also would make it more difficult for investors to purchase, renovate and resell bank-owned properties to first-time buyers because it gives foreclosed-on homeowners a year to sue after a foreclosure sale, critics said. Home buying by investors has been a significant driver of California home sales since the housing market hit bottom two years ago.

"It's unlikely that any prospective home buyer would want to buy these properties with that lingering uncertainty hanging over their heads," said Beth Mills, a spokeswoman for the California Bankers Assn. The bill also would require mortgage servicers to:

•Prove they have a right to foreclose;

• Adhere to new timelines when evaluating borrowers for possible loan modifications;

•Provide an explanation letter detailing why a mortgage modification was not granted if a borrower is denied;

•Make a declaration of compliance with the law each time a notice of default is filed.

The bill also would allow a state banking regulator or the state attorney general to take action against lenders if the law isn't followed.

Major mortgage servicers are under increased scrutiny since it was revealed last year that they employed so-called robo-signers. These bank employees signed off on legal documents needed in foreclosure cases without reading them or, in several cases, understanding what they were signing.

There were widespread complaints of botched loan modifications that left delinquent borrowers worse off, and foreclosures made without documentation of who owned loans that had been sold and resold in the secondary market where mortgage securities are created and traded. Mortgage servicing operations were shown to be understaffed and employees were poorly trained.

In response, federal regulators this month ordered the nation's biggest banks to overhaul their procedures and compensate borrowers hurt financially by wrongdoing or negligence. The agreement between the regulators and banks requires mortgage servicers to stop foreclosure once a homeowner is approved for a temporary mortgage modification.

But consumer advocates criticized those orders as watered down and not going far enough. A wider-ranging investigation conducted by a coalition of state attorneys general and other federal agencies is continuing.

Consumer advocates and lawmakers are hoping that the California bill will have momentum following revelations of the foreclosure paperwork debacle. The proposed law is similar to a bill that passed the state Senate last year but was defeated in the Assembly.

The bill faces a hearing and vote in the state Senate's Banking and Financial Institutions Committee on Wednesday. The committee is headed by Sen. Juan Vargas (D-San Diego), who isn't completely sold on the legislation, said his chief of staff, Jim Anderson.

"My understanding is that Sen. Vargas has some concerns with the bill, but prefers to ask questions of the author and discuss the bill in the public hearing tomorrow before making his final decision," Anderson said. Vargas wasn't available for comment Tuesday.

The bill has been endorsed by a slew of consumer advocacy groups including the Center for Responsible Lending. Many of these groups have slammed federal banking regulators, saying they failed to stop unsafe lending during the housing boom and preempted state attempts to rein in predatory lending.

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Posted by Lehel S. on May 7th, 2011 9:24 AM

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