I've been receiving many calls and emails about California's so-called foreclosure moratorium, which went into effect yesterday. Frankly, I doubt it will actually do anything meaningful for struggling homeowners. Here's why:
Loan servicers can qualify for an exemption simply by filing a form with the state that claims the loan servicer has a modification program intended to keep people in their homes. Nothing in the law requires loan servicers to actually implement the programs (you know, where borrowers actually get their loans modified in a meaningful way), and there's no real mechanism in place to confirm that loan servicers are actually doing anything. Who from the state is going to audit the loan servicer activity? As far as I can tell, no people have been assigned to this task, and more importantly, the state has no money to pay such people because the state is currently broke.
But here's the really interesting part: all this law does is temporarily extend the time between a Notice of Default and Notice of Sale from 90 days to 180 days for lenders who either fail to comply with the requirements, or who choose not to comply.
Why would a loan servicer choose not to comply? Well, there are three reasons:
1) Waiting another 90 days costs the loan servicer little to nothing.
2) So many loans at risk for foreclosure have no lender insurance. If a loan is not guaranteed by the FHA, VA, Fannie / Freddie, or private mortgage insurance ("PMI"), then the note holder absorbs the entire loss when an upside down loan is foreclosed.
3) Lenders have a large inventory of homes already owned because of foreclosure, plus even more in the pipeline. Adding some more time to the foreclosure clock could actually help lenders, rather than homeowners, because it would spread out the lenders' mounting losses on all the upside down properties they are in the process of taking back. This is important because in addition to the actual losses incurred when an undersecured loan is foreclosed, banking regulations require many lenders to set aside reserve money out of their revenue to cover those losses. So for loans owned by banks, the mounting losses start to have a real impact on their ability to use their revenue for their business operations. While I am unsure of whether this reality was factored into the "stress tests" that the government put major banks through earlier this year, it certainly should have been a component.
Thanks for this post! I agree with you--they are just prolonging the pain. They should just let the market hit rock bottom so that we can get started on the road to recovery!