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State of California to delay housing recovery and trap homeowners in a prison of debt

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  • State of California to delay housing recovery and trap homeowners in a prison of debt

    State of California to delay housing recovery and trap homeowners in a prison of debt

    by Sean O'Toole (SeanO) ForeclosureTruth

    Clearly our legislators didn't set out with the intent to delay the housing recovery and trap homeowners in prison of debt, but that is the likely outcome of the "California Foreclosure Prevention Act" that was signed into law last Friday.

    This law imposes an additional 90 day delay on the filing of a Notice of Trustee Sale unless the lender gets an exemption by implementing a loan modification program that meets the state's requirements. You'd think that after the complete failure of SB1137 to do anything but delay the inevitable the legislature would have learned that creating incentive's for loan modifications through changes to the foreclosure process doesn't work, and instead spent their time and energy focusing on things that might actually help.

    To be fair the state has a pretty limited toolbox for addressing the foreclosure "problem." Lenders are by and large regulated at the federal level leaving California fairly impotent in forcing these institutions to do anything. The one thing they do control is the foreclosure process. Which explains their attempt to use the foreclosure process to try to force concessions from the banks.

    The problem is that the concession they are seeking will do NOTHING to help solve the housing crisis--in fact it may make it worse.

    The issue is that foreclosure is actually one of the few mechanisms that is dealing with the real problem at the moment--eliminating the trillions of dollars in unsustainable mortgage debt that was taken on nationwide during the bubble years. By delaying foreclosures we only delay the elimination of this debt and the return to a healthy housing market.

    Sure, it would be better to keep people in their homes through loan modification. But unless those modifications reduce principal balances below current market value, you are just trapping homeowners in a prison of debt, unable to sell when necessary, delaying the inevitable foreclosure, and dragging the recovery out for years. Given the circumstances of real life including job loss, divorce, death, disease, relocation, etc. most will have to sell at some point - and foreclosure will remain their only option. Frankly most homeowners would be better served by taking the hit now and letting their home go to foreclosure then to enter one of these "affordable payment" focused loan mods. With foreclosures now having an average of $180,000 in negative equity in California, they are likely to recover from the hit to their credit far sooner than their home equity recovers.

    Evidence that this plan, which is similiar to Sheila Bair's portion of Obama's housing plan, is failing can be seen at Bair's test case - Indymac bank. Indymac has aggressively implemented this type of foreclosure modification plan, and their number of foreclosures has actually risen. Whether it is is because homeowners simply can't qualify for the modification, or they are choosing not to imprison themselves in debt isn't known. But between the rising foreclosure rates, and the high recitivism rates on the loan mods (folks who stop making payments after the loan mod) - their is ZERO doubt at this point that payment based loan mods have failed.

    While this law, leaves open the possibility of prinicipal balance reductions, as does Obama's plan, it is very unlikely we see lenders take this approach voluntarily. It is one thing to take the loss in principal at foreclosure as you at least recover your cash - it is a whole different thing to reduce principal, and then conitnue to receive low interest on a loan where your borrower has already defaulted once. Let's stop kidding ourselves - this simply won't happen until we point a gun to their heads, have taxpayers pay the difference, or nationalize them.

    If we want to get this economy back on track we will have eliminate the crushing and unsupportable housing debt that was taken on during the bubble years - regardless of who fault it was. Playing games with the foreclosure laws in the vague hope of getting lenders to do something they simply won't do only delays the road to recovery.

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    Last edited by FRED; 02-26-09, 12:35 PM.
    Ed.

  • #2
    Re: State of California to delay housing recovery and trap homeowners in a prison of debt

    Keeping banks floating and keeping people in their homes makes it far worse. To pay back the mortgages requires sucking more money out of the economy to pay them in addition to suspending a real housing market. With a default the original loans will still circulate as free money.

    Comment


    • #3
      Re: State of California to delay housing recovery and trap homeowners in a prison of debt

      Originally posted by FRED View Post
      Frankly most homeowners would be better served by taking the hit now and letting their home go to foreclosure then to enter one of these "affordable payment" focused loan mods.
      Are you sure you mean "then" and not "than" here? The meaning changes quite a bit - doesn't it?

      Comment


      • #4
        Re: State of California to delay housing recovery and trap homeowners in a prison of debt

        You think California is bad, look at what the nincompoops in Baltimore, Maryland are up to:

        http://www.baltimoresun.com/business...,5388079.story

        From the article:

        As the Obama administration moves on a national plan to tackle the mortgage crisis, City Council members Mary Pat Clarke and Bill Henry, both Democrats, have introduced a plan to extend the time between foreclosure and eviction from 14 days to 365 days to encourage lenders to negotiate with owners who are falling behind on loan payments.
        That's right, three hundred and sixty-five days of mortgage-free living. If you were a lender, would you offer mortgages in Baltimore under that condition?

        - Pete

        Comment


        • #5
          Re: State of California to delay housing recovery and trap homeowners in a prison of debt

          Well I obviously agree with the author!

          http://www.itulip.com/forums/showthr...4396#post74396

          Originally posted by CanuckinTX View Post
          • "Washington is going to bail out all homeowners in the United States. The U.S. government will guarantee all residential mortgages involving owner-occupants, including mortgages which are dramatically higher than the value of the underlying property."

            "In return for removing mortgage loan credit risk, Washington will require banks to stretch out principal repayments to owner-occupants so that they do not exceed, on a monthly basis, more than 38% of family or owner incomes. When values or incomes go up, presumably, adjustments will be made. This will provide a floor to property values, a form of welfare to the unemployed and another unfreezing of bank credit."


          This will be a neat trick how they pull this off. So what if someone loses their only source of income, do they get to make zero payments until they get another job? What happens when someone wants to sell their house and it has this artificial 'floor' to the property price which no one else would be able to qualify to buy?

          It sounds like they're going to turn some people's homes into their prison, retirement home and final resting place.
          Last edited by CanuckinTX; 02-26-09, 09:11 AM. Reason: Bolded my final comments

          Comment


          • #6
            Re: State of California to delay housing recovery and trap homeowners in a prison of debt

            All of the above neatly sidesteps the most important aspect of this question.

            Principal reductions
            , regardless of whom pays (and I feel the bank should pay the lion's share) lets sunlight into the shuttered room of mark to fantasy bookkeeping.

            What lender would want to expose those shelves of canned piranhas to daylight :eek:


            Comment


            • #7
              Re: State of California to delay housing recovery and trap homeowners in a prison of debt

              As a California home owner, I definitely appreciate this post Fred! Thanks for updating the link!
              Last edited by MarkL; 02-26-09, 03:06 PM.

              Comment


              • #8
                Re: State of California to delay housing recovery and trap homeowners in a prison of debt

                In related news, on the Fed level:

                FDIC Closes on a $1.45 Billion Structured Sale of Distressed Loans

                FOR IMMEDIATE RELEASE
                February 26, 2009
                Media Contact:
                David Barr (202) 898-6992

                The Federal Deposit Insurance Corporation (FDIC) today announced the conclusion of the sale of $1.45 billion of performing and nonperforming residential and commercial construction loans in distressed markets through the use of two private/public partnership transactions. These structured sales utilize the asset management expertise of the private sector, while retaining for the FDIC a participation interest in all future cash flows generated by the workout of the assets over time.


                In the two recent transactions, the FDIC placed the loans, which were exclusively from the failed First National Bank of Nevada, into a limited liability corporation (LLC). The FDIC retained an 80 percent interest in the assets with the winning bidder picking up an initial 20 percent stake. Once certain performance thresholds are met, the FDIC's interest drops to 60 percent. The future expenses and income will be shared on the percentage ownership of the purchaser and the FDIC.


                "The FDIC is drawing on its previous successes and those of the Resolution Trust Corporation," said James Wigand, Deputy Director, Division of Resolutions and Receiverships. "During the last banking crisis, when asset values were similarly difficult to ascertain, these types of structures ultimately resulted in superior recoveries relative to the then-depressed market valuations."


                The closure of this sale brings the total amount of assets sold utilizing private/public partnership transactions to approximately $3.2 billion over the last year, in five separate transactions. Based on the success of the program and the positive feedback received from the private sector, the FDIC anticipates it will utilize this and similar sales strategies in the future.


                http://www.fdic.gov/news/news/press/2009/pr09026.html


                All said with a straight face :p


                Does anybody have more details on this part of the bailout in action ?

                Comment


                • #9
                  Re: State of California to delay housing recovery and trap homeowners in a prison of debt

                  Housing prices never decline, so why the fuss?

                  Comment


                  • #10
                    Re: State of California to delay housing recovery and trap homeowners in a prison of debt

                    Originally posted by MarkL View Post
                    Where are the references on this? I searched on the purported "California Prevention Act" and found two Google answers when I used quotes and none recent when I didn't use quotes. I also searched on "New California Foreclosure Law" and found nothing signed into last Friday or even this year. Either this blog post is many months old, or it's inaccurate, or for some weird reason there's NO press on this. Or... perhaps I'm missing something...?
                    You mean other than the link in SeanO's article to the bill itself?

                    Originally posted by FRED View Post
                    ...Clearly our legislators didn't set out with the intent to delay the housing recovery and trap homeowners in prison of debt, but that is the likely outcome of the "California Foreclosure Prevention Act" that was signed into law last Friday....
                    Here's sfgate

                    (02-23) 17:55 PST -- Gov. Arnold Schwarzenegger signed into law a 90-day moratorium on California home foreclosures on Friday, but consumer advocates argue wide loopholes will prevent the legislation from significantly slowing repossessions...
                    housingwire

                    The California Legislature, as part of the recently-passed budget package, approved Friday, legislation SB2X-7 and AB2X-7, which provide for a 90-day foreclosure moratorium...
                    info.sen.ca.gov info on SBX2 7
                    info.sen.ca.gov info on ABX2 7

                    disclosure: I am part of a vast conspiracy to convince you these bills have passed.;)

                    Comment


                    • #11
                      Re: State of California to delay housing recovery and trap homeowners in a prison of debt

                      Sean
                      It is one thing to take the loss in principal at foreclosure as you at least recover your cash - it is a whole different thing to reduce principal, and then conitnue to receive low interest on a loan where your borrower has already defaulted once. Let's stop kidding ourselves - this simply won't happen until we point a gun to their heads, have taxpayers pay the difference, or nationalize them.
                      If we want to get this economy back on track we will have eliminate the crushing and unsupportable housing debt that was taken on during the bubble years - regardless of who fault it was. Playing games with the foreclosure laws in the vague hope of getting lenders to do something they simply won't do only delays the road to recovery.
                      I agree with you Sean
                      Many lenders will take a loss and settle for cash today and move on.
                      I would purchase homes for cash from lenders once they foreclosed. I would immediately offer homes for sale at market price with affordable payments, 30 year financing with little money down and carry the paper myself. Homeowners that went threw foreclosure process and a hit on their credit would be my first customers. No future profit sharing agreement, homes with upside value potential 100% controlled by homeowner, giving homeowner real equity potential and stabilizing market pricing.
                      Itís a government game now and they want to push investors like myself away, so have at it, make things worse and more painful with legislation like this.
                      HR1106
                      http://www.gop.gov/bill/111/1/hr1106

                      Comment


                      • #12
                        Re: State of California to delay housing recovery and trap homeowners in a prison of debt

                        The country is looking more and more like California every day. California here we come! green energy facade,high taxes and environmental regulations high cost of living.Oh and bankrupcy!

                        Comment

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