New law linked to 62% drop in California mortgage defaults

A new state law requiring lenders to contact homeowners prior to foreclosure filings has led to a dramatic drop in foreclosure activity in California in September, according to the website ForeclosureRadar.  The impact of the state law is so dramatic, the website says, that it will make monthly foreclosure statistics worthless as barometers of housing market conditions.

Foreclosure Radar reports that the number of notices of default filed in September dropped 61.8% from August levels, and the number of notices of trustee sale filings -- which mark the end of the foreclosure process -- dropped 47.3% in a month.

The website, which had previously predicted that such a slowdown was coming, says the cause is California Senate Bill 1137, which requires lenders to make a series of attempts to contact homeowners, and then wait 30 days before filing foreclosure notices. In a news release today, Sean O'Toole, founder of ForeclosureRadar, says the new law has made month-to-month foreclosure statistics "useless in understanding market conditions."

More, from O'Toole: "We expect SB 1137 to have no long term impact beyond delaying the foreclosure process for homeowners, and slowing the overall recovery."

The new California law encourages loan modifications as an alternative to foreclosure, a common goal of various government programs. O'Toole, however, is doubtful that loans can be successfully modified on a broad scale in California:

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. 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.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo Credit: Bloomberg News.

Comments

[Lou]

Further proof that our politicians are complete morons. These people were screwed the minute they signed their loan docs. There's no way to keep these people in their homes but the politicians can't figure that out so what do they do? They slow down the inevitable price correction that is needed to fix the economy.

[socalinvestor]

I personally have noticed a drop in the number of REO homes entering the market over the last few weeks. I was puzzled about the reason why but this explains it. I agree with O'Toole about the new law simply delaying the inevitable. Infact, I'm of the opinion that no law or bill can stop the inevitable, which is the gradual decline in Socal housing prices to affordability ratios similar to what they were before the boom began.

[BullishNOT]

Bonus points for the first link to a story claiming the drop is evidence of a bottom without mentioning the new law.

[OverIt]

Part of me thinks that O'Toole underestimates the ability of the Fed to do anything and everything to avoid facing the ugly truth. He's trying to come up with a solution using old ways of thinking. The Fed on the other hand is writing new rules and rewiring the old circuitry as we speak.

On the other hand, at some point prices have to be supported by something that resembles fundamentals.
No amount of legislation, creative accounting or redefinition of what it means to be solvent either on a personal or macroeconomic level will change that.

[sheila]

i have yet to see a good answer to my question - why on earth don't all the mortgage holders just adjust the rate to 6% for 30 years and call it a day? not re-appraise, re-qualify, re-anything. just change the rate and amortize it over 30 years on a one-pager.

a ton of people could make these market-rate payments (as opposed to the 11-13% they are paying now), no writedown would be required, and no foreclosures for people who can actually afford what they bought. this will weed out everyone who TRULY can't afford their house, while keeping people intact who are willing to ride out the downturn...

[FreedomCM]

Sheila's idea may work for the subprimers who are paying higher rates, although it is not clear to me how long they would be willing to pay PITI if it is 2x rent for a similar place if the value of the loan they are paying off is 3x the value of buying a similar house.

In addition, much of the foreclosure activity now and coming up shortly is supposed to be due to optionARM and regular ARM that started at a lower teaser rate. For those people, 6% may triple their monthly payments.

[TC]

Sheila,

There is no good answer to your question because that scenario is, in a word, "unpossible".

People who could afford the value at the time usually leveraged more cash out of it. Folks who could not, well, they never could. So strapping either with this massive black hole for 30 years is futile. They may not see a return to equitable levels for 15 years. So they would become indentured servants to that bad loan.

Purge the system. Losses are losses. I would estimate a low percentage of defaulting mortgages could actually be saved, meaning it is worth it to both parties. I would guess around 10-20%. The market only recovers when home prices fall and those responsible folks on the sidelines waiting can enter the market. Think loan to income ratios of 3 in lesser areas and up to no greater than 5 in more desirable areas.

[I Live in L.A., Too!]

Sheila, for once, I may actually agree with you.

[joncmac]

Good news for once. this may be the beginning of the end of crisis. The federal gov't FHA and Bank of America/Countrywide have committed to helping over 800,000 homeowners between them keep their homes. More info on the programs here.
http://www.needhelppayingbills.com/html/help_with_mortgage.html

[BullishNOT]

Great Question Sheila and I think it is worth as many answers as people care to post. I can think of several reasons why it won't work:

1) The number of people who could afford this at fixed at 6 (or market) is very very low compared to the numbers who bought way too high or refinanced themselves out of ever possibly being able to pay;
2) Someone has been promised that 11-13% interest or whatever and there would need to be massive writedowns of the value of the assets tied to those promises ;
3) Not enough (or not many) would agree to essentially refinance their house at 6% based on what they paid when the current price on the block is 40% less with no hope of returning.

Anyone else have any ideas?

[Sklaffer]

If you don't like the statistics that are coming out, change the basis on how you count them. Margaret Thatcher,and more recently G.W.Bush are masters of this technique. It's like changing the curtains in a burning house.

[E]

Good luck with the speculator held option-ARMs on those empty condos all over the country.

[Crash and Burn]

Reasons why banks don't want to re-write terms and re-write the principle:

1. They have to take a big loss, which if they did it for everybody, would cause them to become insolvent (there goes the company jet).

2. The banks figures, if you are a flake who doesn't pay your mortgage, you are still going to be a flake who doesn't pay your mortgage with a loan with better terms (they were OK with their customers being flakes when prices were only going up and they couldn't loose).

3. For the houses that do foreclose, they want the cash. Everybody wants to throw as much cash into the vault like chipmunks who know a really hard winter is coming to improve their poor chances for survival.

4. Why refinance when John McCain says he is going to buy these loans for banks at FACE VALUE so they would loose NOTHING MAKE A HUGE BUBBLE ERA FAAAAT PROFIT but YOU THE TAXPAYER WOULD LOOSE TRILLIONS. With idiotic proposals like this, they figure they'll take their chances fishing capital hill in case they get lucky and John McCain wins.

5. Currently the Executive branch of the US Government is too weak, ineffective,and stuck following ridiculous right-wing dogma to strong-arm the banks into coming to real terms with their mortgage losses, taking prudent actions to limit additional losses, and take over some of the banks that inevitably fail in order to keep the economy pumping when the losses are realized.

So the banks are saying, we got YOU into this mess, now its time for YOU to get us out, we aren't going to do anything sensible without being forced too (and why do something sensible when their are plenty of idiotic ideas to send a truckload of money to these same banks who made this crisis).

[Flaaash]

Sheila, think of it this way. If you had an option to loan two people, one with good credit and one with bad credit money at 6%, who would you lend it to? Likewise, the people willing to lend it to those with bad credit expects a higher return for the risk they are taking. In a perfect world, everyone pays bck their loan on time and everyone gets charged the same rate. Unfortunately, there is no such thing..,

[latesummer2009]

Homeowners that bought in Bubble markets over the last 5-8 years are screwed. Plain and simple. Instead of dragging it out and torturing the market over the next 3-5 years, just get it over with, so we can flush out all the garbage.

Nothing is going to save these people. That includes Subprime, Alt-A and Prime.

Time to face the music.

http://www.westsideremeltdown.blogspot.com

[sheila]

thanks for the answers, but what everyone seems to be ignoring is the large segment of people who WOULD pay their mortgage at 6% fixed for 30. nobody would be FORCED, but anyone who wanted that deal should have been able to have it for the past 3 years as this thing unfolded. if they default on that, then that's a real default.

people had a reasonable expectation of being able to re-fi into a modest fixed rate loan even after a teaser rate, because we have been doing it for 20 years and people like Allan Greenspan were promoting that arrangement. as it turns out, hundreds of thousands of people who qualified for fixed were intentionally steered into ARMs by corrupt banks/brokers (see $8 Billion settlement with Countrywide for one example), so why shouldn't they have the CHOICE to stay?

i think there are hundreds of thousands of families who would choose to stay in their home at that rate, and who could afford the monthly payment, and who would prefer to deal with equity scenarios if and when the time comes that they have to move. this "crisis" is treating all these houses as though everyone has to move at the same time, and it's just not true. plenty of people would sit there for 10+ years and equity would be totally irrelevant.

again, people can choose to walk, but for those who want to stay, why aren't banks making it easy? any lender/investor who was "promised" 11-13% knew that people were likely to re-fi, and/or should be delighted to get 6% instead of 0% and a big loss. i think a lot of people care more about stability than equity, and would stay and pay.

[Cal]

Sheila,

The idea ignores how modern day MBS are structured, the senior level tranches would lose the most in a deal like that. The junior tranches however think your idea is the bees knees.

[Sean OToole]

Sheila - the problem with your proposal is that many of the loans that are foreclosing had initial payments that would require an INTEREST ONLY rate of 2-3% in order to be affordable. That is hardly sustainable, yet Countrywide just announced a plan to do exactly that... for 5 years. Case in point, a Countrywide customer with a $900k loan, on a house now worth $450k, and Countrywide just modified their loan to a 2% interest only for 5 years, perhaps using all the cheap new FED money (real example).

[Crash and Burn]

OK Sheila got about 5 different answers to her question, most of them good and still doesn't see why banks don't want to reset loans. This exemplifies why so few people get what is going on here and how the mortgage companies were and still are getting away with MURDER, and people are so pissed off about a "bailout", but then when John McCain proposes a massive giveaway, most are confused too confused to get really outraged.

[California Mortgage Loan]

It's very important that anyone facing foreclosure know, and be notified by the lender that that's where they are at. Thank goodness for this new law.