The likelihood of a homeowner being approved for a short sale and foreclosed on a day or two later has diminished as a result of California laws that took effect Jan. 1.
Gov. Jerry Brown signed the Homeowner Bill of Rights into law to help ensure fair lending and borrowing practices. The law pertains to first trust deeds secured by owner-occupied properties with one to four residential units, according to the California Association of Realtors.
As part of the laws, homeowners are guaranteed a single point of contact with a person or team at a bank familiar with their case.
Part of the laws reflect the settlement where 49 states sued some of the major lenders, said Peter Solecki, a real estate attorney and partner at Larson & Solecki and general counsel to the San Diego Association of Realtors.
“I personally had people call me 20 times over the last five years where they are approved for a short sale or approved for a loan modification and then foreclosed on a day or two later. It was unfortunately very common,” Solecki said.
The law also states there is to be no dual tracking during a short sale or loan modification. This means that a mortgage servicer or lender can’t record a notice of default or notice of sale, or conduct a trustee’s sale, if a foreclosure prevention alternative has been approved in writing by all parties, or if the borrower’s complete application for a first lien loan modification is pending, according to the California Association of Realtors. A mortgage servicer must withdraw or cancel a pending trustee’s sale if a short sale has been approved by all parties.
Mark Goldman, real estate professor at San Diego State University, senior loan officer with C2 Financial Corp. and principal at The London Group, said a family member was a victim of dual tracking. A loan modification was in the process of being considered and the family member was placed on a trial modification for three months. The bank was working on a foreclosure at the same time, and after making three payments, he found out the property sold in foreclosure within 30 days.
“They negotiated the loan modification while they continued to process the foreclosure. They weren’t acting in good faith, and they’re now not allowed to do that,” Goldman said.
Acting in good faith may also bring in more money for banks by giving distressed customers an opportunity to resolve their problem on the loan and a reason to “come clean, as opposed to getting angry and frustrated,” Goldman said.
One of the provisions allows homeowners to sue the bank and recover attorneys’ fees and costs if the borrower prevails.
“I always ask [the borrowers] two questions. How much do you owe? That’s x. And what’s your home worth? That’s x minus y. So, let me get this straight. You want to pay me big bucks so you can save your debt,” Solecki said. “I would never take those cases because I didn’t think I would help those people. They were not cases where people had equity in their homes. They were cases where the homes were underwater.”
Other provisions of the law include, according CAR: no late or application fees while a first lien loan modification application is under consideration, a denial is being appealed, the borrowing is making modification payments, or a foreclosure prevention alternative is being evaluated or exercised; a mortgage servicer must provide a written receipt of a complete first lien modification application or a connected document that describes the process, including a timeframe and any deficiencies on the application; written approval for a foreclosure prevention alternative shall be honored by a subsequent mortgage servicer if the borrower’s loan is transferred or sold; and mortgage servicers must notify a borrower before and after a notice of default.
“There was some concern that there would be some significant issues with lack of two tracking. I think the general trend is continued,” Solecki said. “Foreclosure times are lengthening so it’s taking longer to foreclose on people. The short sale process continues to get better over time as the banks get more used to doing things. The single point of contact will be helpful but it’s too soon to tell how helpful it has been.”
Solecki said the biggest thing that’s helping is the economy.
“With the economy getting better and home prices going up, I’ve started to see already the first articles that say, ‘Are we into our next bubble?’” Solecki said.
Three people in the past three weeks told Solecki that they have received letters — two from Bank of America and one from Chase — that said their second is going to be reconveyed to them and they need to take no action and the reconveyance is in the mail.
“Things have slowly improved over time. From the total disaster of five years ago to these incremental laws that have at least given some structure. Laws that have been decried by some as unfair and inappropriate and allowing people to walk,” Solecki said. “I don’t see that myself, because the people I’m dealing with, many of them didn’t have a choice in the matter. And the banks believe the property was going to go up forever, and we could just bundle this up and sell it and make a ton of money. And it turns out they’re wrong and the government bails them out. Why should the individual suffer the burden when they did what the banks told them to do?”
Solecki’s clients at the beginning of the downturn were people heading into a situation where they would be underwater on their mortgages. Most of Solecki’s clients now are strategic defaults. A homeowner with a strategic default may be underwater for $100,000 and could pay, but it doesn’t make economic sense to, so they short sell it, Solecki said.