The news is filled with reports of JP Morgan Chase, Ally (GMAC) and politicians like Senator Menedez calling for foreclosure moratoriums. While it is true that Bank of America announced moratoriums in 23 states–California is NOT one of those states. Why not?
Some states, like the 23 states that have the voluntary moratorium, requires a judicial foreclosure–one where the court must be involved.
California is dominated by a non-judicial foreclosure process, which is intended to be a speedier remedy for lenders. However, the California legislature has already extended the previous 4 month time period to conduct the foreclosure by an additional 90 days so it pretty much takes 7 months or more now to actually conduct the foreclosure, which does not include the 3 – 6 months the lender usually gives the delinquent borrower to get current or otherwise workout the loan. So it’s already a year or more in California for a borrower to miss payment before the foreclosure actually happens.
I have to ask — isn’t that long enough?
ASSUMPTION #1 I think a lot of politicians make the assumption that many Americans want to keep their homes.
That just hasn’t been the case in my practice. I am flooded with calls from people who can’t wait to unload their overpriced house and who want to know how to “walk away.” Many of them have become overwhelmed with trying to maintain the house or do a loan mod, or have seen their neighborhood change with the surge in vacant REO houses. They want to move but can’t. These borrowers would be relieved if the foreclosure would just happen already and the borrowers could rent a place closer to work, shorten their commute and rebuild their credit.
Some of these borrowers recognize that even with the reduced loan payment amount, they could never recover their downpayment out of the house because they do not see the house appreciating enough. Imagine the borrower paid $700k for a 3 bedroom, 2 bath house in San Jose. That same house is now worth $400k.
Say the borrower put $70k down on the house and had a loan for $630k. That borrower now sees that they could wait another decade and may never recover the $70k they put in, but they would have paid $5k in interest payments for a year which would be $60k. Even if the bank reduces interest payments in half, that would be $30k/year in interest payments, and $90k in 3 years which would exceed their initial downpayment. This borrower sees there is no economic reason, no financial benefit to keeping the house. Should they keep throwing good money after bad? Suppose they could rent a house for $2000 per month in a better school district 10 minutes away–now what do you think they would rather do?
Presently something like 90% of borrower are paying their loans…and 10% are in default.
Imagine for every neighborhood in California, there is at 1 in 10 homeowners in default. Imagine half of those homeowners want to walk away.
How would a foreclosure moratorium help this homeowner who wants to walk away?
If the lender would take a deed in lieu or otherwise implement a cash for keys program, perhaps the borrower would be better served by that. Problem is, most of these borrowers have 2nds…and so the the senior lender can’t take a deed-in-lieu because it requires a foreclosure sale to wipe out the 2nd and get clean title.
This post is not intended to disparage the homeowners who are genuinely trying to modify their loan and work with their lenders. My point only is that it already takes the lender a year to get to foreclosure in California as it is–if they can’t get their act together in a year to work something out with the borrower, a moratorium of a few more months won’t help anyone. Perhaps it would be better to legislate the loan mod program timelines themselves than the foreclosure.
ASSUMPTION #2 I think a lot of politicians and consumers make the assumption that many lenders want to foreclose.
WRONG. Many lenders do not want to take back property. They are in the lending business–not the “real estate owned” REO business. Lenders have already been holding back on sales where they could have foreclosed long ago but haven’t. This is called “SHADOW INVENTORY”. Essentially a moratorium gives institutional lenders time to do what they have already been doing–spinning their wheels and waiting.