Legislation Drives Huge Drop in California Mortgage Defaults

Recent legislation in California helped push notice of default filings, which indicate the start of the foreclosure process, down 61.8 percent in September, according to a recent report released earlier this week. ForeclosureRadar, which published monthly foreclosure data, found that only 16,352 notices of default were filed in September, down from 42,790 in August, and a decrease of 36.4 percent from a year earlier. California State Senate Bill 1137, which went into effect Sept. 8, imposes significant new requirements on lenders prior to filing for foreclosure — including the requirement that servicers contact homeowner borrowers to explore options for avoiding foreclosure on their primary residence at least 30 days before filing a notice of default. The bill also affected new notice of trustee sale filings, which dropped 47.3 percent from August. The bill did not directly impact foreclosure sales; however, the number of foreclosure sales in the state still fell by 12.4 percent. Despite the monthly drop, properties taken to sale at auction increased 163.2 percent from the prior year, to 23,409 sales, with a combined loan balance of $9.75 Billion. Lenders took back 95 percent of the properties taken to auction, ForeclosureRadar said, with a combined loan value of $9.19 billion. Third party purchases were flat from the prior month, but increased slightly as a percentage, due to the decline in sales activity. “CA State Senate Bill 1137 has rendered analysis of current activity against prior foreclosure levels useless in understanding market conditions,” said Sean O’Toole, founder of ForeclosureRadar. “What is important to watch now, is how quickly lenders and trustees adjust to the new law. While it is unlikely foreclosures will return to previous levels, given the new requirements, we expect SB 1137 to have no long term impact beyond delaying the foreclosure process for homeowners, and slowing the overall recovery.” The intent of CA State Senate Bill 1137 is to reduce foreclosure rates with one of the requirements being that lenders make contact with homeowners prior to filing a foreclosure, to ensure that they are aware of all their options. The bill requires lenders to make a series of attempts to contact homeowners, and then wait 30 days after either contacting the owner or fulfilling the required steps before filing the foreclosure notice. The bill specifically looks to encourage loan modifications as an alternative to foreclosure. The state, however, cannot force lenders, often operating under Federal Law, to modify an existing loan. “Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions, or extending the unsustainable teaser rates that created the foreclosure crisis in the first place,” O’Toole contended. “Wide scale adoption of large principal balance reductions also pose significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default, and/or foreclosure activity in the future, a consequence clearly not intended.” Average discounts offered by lenders on the outstanding loan balance at foreclosure auction averaged 37.4 percent statewide; with 36 percent of properties taken to auction being offered at discounts of 50 percent or more. For more information, visit http://www.foreclosureradar.com.

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