Calif. Homeowners Bill Of Rights Aimed At Easing Foreclosures
March 1, 2012 11:54 a.m.
Dr. Michael Lea, director of SDSU's Corky McMillin Center for Real Estate.
CAVANAUGH: Our top story on Midday Edition, the real estate market in San Diego is still struggling and so are San Diego homeowners. Notices of default, the typical start of the foreclosure process, were up 12% in January over the December numbers. So a lot of people in San Diego could use some help. And that's just what state attorney general Kamala Harris says a package of bills she announced yesterday will provide. It's called the homeowner's bill of rights. And joining me to explain it is my guest, doctor Michael Lee, director of SDSU's corky McMillan center for real estate.
LEE: It's a pleasure to be here.
CAVANAUGH: We talked a couple of weeks ago on this program, and all over the news, about what California is getting out of a national settlement with the banking industry. Can you remind us about that?
LEE: Yes, there was a settlement with five of the largest banks, and that settlement was meant to do three things. The first was to provide some financial relief for homeowners still in their homes and in distress. Of the second is to try to clean up the servicing and foreclosure process to create greater transparency and certainty in that process, and the third one was for the bank's perspective, give them a partial release against future claims.
CAVANAUGH: What was the money in particular supposed to do for homeowners who are struggling to pay their mortgages and to stay in their homes?
LEE: There were three major areas that the bill addressed. The largest bulk of money is designed to go to principle reduction for homeowners who are under water at this point in time. Their mortgages are worth more than the value of the house. There's also some money set aside for refinancing of loans for borrowers who haven't been able to benefit because of their underwater status, and the third part was a smaller amount that went to the states for specific foreclosure prevention initiatives.
CAVANAUGH: There was some controversy, a guest we had said they didn't think that was going to be enough to make any real impact on the situation in California, even though we got the biggest chunk of that settlement. Would you agree with that?
LEE: I would agree with that. If you look at the magnitude of the problem, take for example the number of homeowners who are underwater, and the amount by which they're underwater, and it's something in the neighborhood of $400 billion, nationwide, and this is $25 billion. So you can see it's a very small amount. And that obviously raises the question about how do you determine who gets it?
CAVANAUGH: Okay, so that's what's already happened. Let's move onto what is being proposed now. It's a package that was unveiled at the attorney general's news conference yesterday. What does attorney general Kamala Harris say the package aimed at?
LEE: Aimed at the same objectives that the national settlement was. And what it does is codify and extend some of the provisions that are in that settlement. And so the major focus of this, first of all, to provide some consumer protection with relation to the whole default and foreclosure process. And also then to provide some penalties and deterrents for banks in terms of future behavior.
CAVANAUGH: Let me go through just a few provisions in this package of bills. One thing calls for -- it calls for basic standards or fairness in the mortgage process, and one of the ways it wants to do that is to end dual-track foreclosures. Can you explain to us what those are?
LEE: Yes. A dual-track foreclosure is a situation where the bank is both negotiating or reviewing a loan modification request and pursuing a foreclosure action at the same time.
CAVANAUGH: So if this legislation passed, the bank would have to choose one or the other?
LEE: Well, it's a little bit more specific than that. The legislation as proposed would require the bank to go through a modification review process, a thorough review of all the alternatives, and if they reject it, then they could go into the foreclosure process.
CAVANAUGH: I think that we heard on this program that the dual-track foreclosures were actually hurting a lot of homeowners. What was the problem with that?
LEE: Well, there's probably some homeowners who might have been able to qualify for a modification, but their foreclosure sale happened before they could finish the whole process. And you have to remember the modification, review, and qualification process takes a good amount of time. So there's definitely some evidence that that was happening. How much is probably a matter of question.
CAVANAUGH: In looking through the proposed homeowner's bill of rights as it's being called, this package of legislation, it made me think what laws, if any, governor how banks proceed on foreclosures now?
LEE: Well, it's in state law with regard to the actual foreclosure process, which in terms is filings and particular ability of the homeowner to contest this and create certain timing elements. But in terms of the process of how the bank goes through this, there really hasn't been any specific legislation in this regard. It's really been industry practice with the framework of, you know, what defines a loan in default, and what are the steps that the bank has to take to go through the foreclosure and repossession process?
CAVANAUGH: It seems as if this is trying to put into law the idea that banks have to try to work with homeowners to a certain extent before a foreclosure actually proceeds.
LEE: That is one of the objectives heres, whys.
CAVANAUGH: What kind of enforcement teeth are in this homeowner's bill of rights package? Is there any way that the state can make people accountable if they don't obey these rules?
LEE: There's a couple of things in the bills. One is to create this trust fund that would be funded by a $25 pee on the default process that would go into funding a fraud unit, which would effectively be going after lenders, if there was a view that they weren't following the proper procedures and practices. There was also something about having a grand jury investigate violations, etc. So the state has various legal avenues to do this. To my knowledge, it doesn't set up any kind of regulatory body that's going to be specifically involved in this. It's still going to be self-policed by the industry.
CAVANAUGH: Is there any other way that this homeowner's bill of rights changes the way foreclosures are handled?
LEE: Well, it's going to I think still lengthen what we call the liquidation process. With the whole robo signing scandal, what you've seen is the amount of time it takes from when a loan is declared in default to when you actually finish the foreclosure process has been getting longer and longer and longer. And in fact, now in California it's between one and two years that people are in their house before they actually have to vacate it. In some other states it's significantly longer. And when you think about what the banks are going to have to do, and some of the risks that they're going to be exposed to in this, I think we're not going to be shortening those timeframes for a while. And I think one has to recognize that while I think the number of these protections are very good, that it imposes costs and creates risk for lenders that may impact their decision about future lending.
CAVANAUGH: Doctor Lee, we have a caller on the line. Dave is calling us from imperial county. And Dave, good afternoon. Welcome to the show.
NEW SPEAKER: Hi, how are you? I was just wondering if the guest or anybody else listening knows if there was a ceiling on the loan amount -- in other words if you were over a certain amount on the loan then you were not eligible for any of the relief packages. I think they were called jumbo loan, and I believe the number of $417,000. A lot of real estate in San Diego was hyper inflated in value, and I'm sure that there are people out there with loans that are larger than that amount. Anyway, I'll take my answer off the air.
CAVANAUGH: Thank you for the call. Any of these provisions directed toward those jumbo loans?
LEE: Actually, jumbo loans could very well be covered in these provisions. In fact, the logic is reversed in this. Fannie Mae and Freddie Mac, which own a lion's share of the loans in the country are not covered by this in terms of the loans they own, and the settlement. It doesn't include them at all. And what the caller is referring to is that there are loan limits that create the maximum loan that they could purchase. And so a lot of the loans that would be covered in this are either held on portfolio by banks or securitized in the private market.
CAVANAUGH: Let me get back to the provisions in the homeowner's bill of rights. I know there's a section that has to do with mitigating blighted property caused by foreclosure. What would -- how would they do that?
LEE: Well, I think they really put the onus on the owners of properties that have gone through foreclosure, either the banks if they still own the property, they've taken it back in the foreclosure process; or if it's been sold either as a bank REO or as a short sale that there are just now standards that the new owner, whoever that is, has to clean up the property and eliminate any kind of blight. And that addresses the fact that particularly in areas where there are a number of foreclosures happening simultaneously, houses haven't been maintained, and that affects the property values of the entire community.
CAVANAUGH: What is the most important part of this proposed package of legislation?
LEE: I think if it creates more certainty, transparency in the foreclosure process and standardizes that process, in the long run that will be a benefit. I think as we've already talked about, the magnitudes which they're talking about, which may sound big to us, $25 billion, relative to the size of the problem are small. I was hoping that it would create a good deal more certainty so banks would feel more comfortable going on, doing lending. As I read the details both in the settlement and the homeowner's bill of rights, I think that there's still significant costs and risks and uncertainties for the banks, with regard to future lending that these agreements and these laws would have. So I'm afraid that the lasting effects would be that we're still going to have a really tight set of guidelines for new lending.
CAVANAUGH: Can you explain -- I was going to ask you what's the negative part of this package of bills. But why would that be one of the offshoots of the homeowner's bill of rights, that lenders would tighten up on credit?
LEE: There are still risks associated with the lenders that if they are viewed as not following all these guidelines to the letter, that they can be exposed either to in one part of the bill that borrowers can go to court and take action, which slows down the process and increases potential losses. Or that you have grand juries or you have states attorney general that are looking over their shoulders and making sure everything is done right. That doesn't mean that they shouldn't be doing a lot of these things right, but it has a cost, and it has a cost in terms of the bank that has to be taken into account.
CAVANAUGH: So Kamala Harris and legislators propose a package of bills they're calling the homeowner's bill of rights. I'm wondering if this has any chance of helping people who are struggling right now in San Diego to stay in their homes, to modify their loans, and to avoid foreclosure. Obviously this package is not law yet. So how quickly might it become law, and would it be able to help people in the near future?
LEE: Well, I don't know the timelines for when dispersements or loan identifications, principle reductions could actually take place, but I think it can help some people here because here you obviously have a lot of people that have negative equity, you have a lot of people that could benefit from a refinance. So far the extent to which San Diego gets a portion of the California money, it can and probably will help some of our homeowners.
CAVANAUGH: And specifically for this bill of rights package, do you feel that it will clear the assembly and the state Senate?
LEE: Yes, given the political makeup of the legislature, I think these are likely to pass.
CAVANAUGH: You teach real estate here at the SDSU campus. What's your take on the San Diego market? Where are we now? Where will we be by the end of the year?
LEE: I've been saying for a while we've been bouncing along the bottom from the standpoint of prices and from the standpoint of transaction volume. I do think that we're going to see some pickup over the course of the year. If the effects of this are significant and it keeps the stress off the market, that's going to alleviate some of the downward pressure on prices. But we're still going to have a lot of foreclosures and liquidations that are going to come through the pipeline.
CAVANAUGH: Thank you so much.
LEE: Thank you, Maureen. A pleasure.