One of the worst parts of going through a foreclosure is the sense of helplessness. There's a lot of waiting and hoping and let-me-transfer-you-over run-arounds. The process feels closed and distant, marked by indifferent operators and vague brief loan modification denial letters.
California would become the first state to ban "dual-tracking," banks' practice of advancing foreclosure proceedings while a borrower's loan-modification application is pending. The law requires that major banks assign homeowners a representative to serve as a liaison for the duration of the foreclosure process. It forces banks to explain in detail why they denied a loan modification request. And it allows borrowers to sue lenders for severe state law violations.
The bills, currently awaiting Gov. Jerry Brown's signature, slow down and clarify foreclosure and loan modification proceedings for homeowners. Most importantly, the regulations shift more responsibility onto lenders to ensure that borrowers receive a fair shake.
The legislation expands on and locks into state statue the regulations enacted in the multi-state, $26 billion foreclosure lawsuit settlement against Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial.
Opponents of the bills (the finance industry, lending industry, California Chamber of Commerce, and most Republican legislators) claim that the new regulations will lead to frivolous lawsuits and hurt the housing recovery by bogging down foreclosure proceedings with -- everybody's favorite Big Government catch phrase -- bureaucratic red tape.
The way people have been losing their homes, though, more red tape sounds pretty fitting. And the pain has been especially acute in the Golden State. In 2011, more than a third of the 100 zip codes with the highest foreclosure rates in America were in California.
In our May feature story, "The Dispossessed," Bayview homeowner Geary Brown saw his monthly mortgage payment soar from $1,800 to $2,800 two years after he refinanced his house. He began missing payments, he went into foreclosure, and Bank of America eventually put his house up for auction in early 2012. (With help from non-profit group Alliance of Californians for Community Empowerment, Brown recently re-entered loan modification talks with BofA.)
Brown's experience would have been significantly different under the laws passed yesterday.
In 2010, a few months after Brown began missing payments, he sought a loan modification with BofA. The process, he recalls, was especially frustrating because whenever he called to check-in he would get no further than the token "Press Zero" representative, who would regurgitate the expected one-liner about how the modification is being looked at and they'll let him know when they've made a decision. On different days he'd speak to different representatives, who were likely looking at his file for the first time. And the representatives, for their part, are getting dozens of Geary Browns calling them everyday.
The new law, which passed 53-25 in the Assembly and 25-13 in the Senate, requires that big lenders (those who process 175-plus foreclosures a year) "promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact." That representative (or team of representatives) is responsible for explaining the homeowner's options, has direct access to the homeowner's information, must ensure that the homeowner receives "all documents associated with available foreclosure prevention alternatives," and must notify the homeowner if any loan modification application form documents are missing. This point of contact has to have "access to individuals with the ability and authority to stop foreclosure proceedings when necessary."
While Brown was negotiating for a modification, the bank was pushing forward foreclosure proceedings -- the now-banned practice known as "dual tracking." Banks argue that this method saves time, and covers their backs in case the homeowner does not qualify for a modification. Housing advocates argue that "dual tracking" unfairly accelerates foreclosures for homeowners, who are often surprised to get eviction notices while they think they are still working with their bank to avoid foreclosure.
The fresh legislation orders that foreclosure proceedings halt while a modification is pending.
BofA denied Brown's modification application. He didn't know why. Under the new law, though, the bank must "send a written notice to the borrower identifying the reason for denial." One of the most common reasons for denial is that a foreclosure sale yields more profit than a modification.
As BofA spokesman Rick Simon told SF Weekly previously, "In the end, the loss taken by the investor to modify a loan, including lost interest income over the average life of the mortgage, must be less than the expected loss incurred if the loan goes to foreclosure."
It's a simple calculation from a formula. And the just-passed regulations order that banks show their math if the borrower wants to see it.
If the application is denied, the regulations state, the homeowner has 30 days to appeal. If the bank also denies the appeal, it must wait two weeks before greenlighting the foreclosure process. The bills also possess minor requirements aimed at ensuring that homeowners are informed: banks are required to estimate when they will make a decision on a modification; they must post "a prominent link on the homepage" of their website that explains the options available to homeowners unable to make their mortgage payments; they must provide the toll-free phone number to a Department of Housing and Urban Development-certified housing counselor agency.
Geary Brown, like many others in his situation, felt helpless as he sought to keep his home. He didn't know why he couldn't get a modification. His only contact with the banks were through low level representative and curt letters stating that BofA was "considering" or had "denied" his application. He felt like he had run out of options.
So he called American Home Financing, one of the many foreclosure assistance services that popped up in the wake of the housing crisis. Their representative told him that they would work directly with his bank, using their knowledge of the housing market and legal expertise to lower his mortgage payment. The foreclosure assistance industry has been a sort-of wild west -- unregulated, lucrative, and shady as hell. (The Better Business Bureau gave American Home Financing an "F" rating.) But Brown needed a modification and these people said they could get him a modification.
He wrote American Home Financing a $3,500 check and then never heard from them again. Next thing he knew, an eviction notice was in his mailbox.