The CHBR begins January 1st, so the scrutiny should be ramping up. While this is a great article, it ends abruptly because no one can quantify how the CHBR might limit credit availability. If it means down payments will be 4% to 6% larger, that isn’t a bad thing for the overall health of the market.
Two key ingredients going forward – 1. California foreclosure laws are fantastic, and 2. FHA and other low-down payment mortgages aren’t going away, they might end up being tougher to get – creating more distance between the haves and have-nots.
While some of the California Homeowner Bill of Rights provisions are reasonable, given the recent problems resulting from an unprecedented wave of foreclosures in the state, many others will needlessly interfere with a process that has mostly worked as intended.
California legislative bodies recently passed the group of bills, and Gov. Jerry Brown signed the bulk of them on July 11.
The new laws represent another terrible example of populist policy ignoring both data and logic. Ultimately, CHBR will cost California’s future homebuyers by limiting the availability of credit.
Some of the new rules are modest — requiring mortgage servicers to provide a single point of contact for delinquent borrowers, and giving local governments certain tools to prevent blight, for example. But the centerpieces of the laws are quite disruptive. One statute prevents banks from pursuing foreclosure while there is any effort on the part of the borrower to obtain some sort of loan modification. Another puts the onus of communication on the loan servicer — forcing them to make significant effort to contact borrowers regarding the foreclosure process. And most significantly, the new rules open servicers up to the potential for spurious lawsuits on the basis that the borrower has some yet-to-be-defined “reasonable” suspicion that the servicer does not have all the appropriate paperwork.
In short, the rules will substantially extend the length of time it takes to complete the foreclosure process and raise the overall cost.
CHBR supporters claim the new procedures will improve a homeowner’s chance of staying in his or her home through a loan modification, and that this will help “fix” the state’s real estate market. Unfortunately, the authors of the bill failed to consider the ample and solid evidence that contradicts both assertions. Even more unfortunately, the new rules will be of little benefit in the short run, but have very real costs in the longer term.
While it is always sad to see someone lose their home, a foreclosure is the result of failing to pay the debt that was secured against the property. California has, at least until now, had one of the more efficient systems of foreclosure in the nation. Is the efficiency good, or does slowing the process help?
SLOW VS. FAST
A December 2011 study from researchers at the Federal Reserve Bank of Atlanta found that states with slower foreclosure processes did not see more modifications, but did have high rates of foreclosure — something they attribute to basic incentives. When a borrower can live rent-free for a longer period of time, they are more likely to strategically choose foreclosure over other options.
As for the question of market recovery, consider a state with a less efficient system — such as Florida and its judicial process. Florida’s housing market is a veritable mess. More than 14% of all mortgages in the state are still somewhere in the foreclosure process. Compare that to California’s efficient system, which has already cleared the majority of bad loans from the system. Today, California isn’t even in the top 10 states in mortgage distress — only a few years ago, we were No. 2, just behind Florida. And with new owners, who have long-term interest in their properties, investment is once again flowing, confidence is growing, and sales and permits are rising. California’s seemingly “harsh” foreclosure model has ultimately given all homeowners a leg up by clearing bad loans from the system quickly.
And while there is little benefit in the short run, researchers have also found that lengthy, difficult foreclosure processes have very real implications for future borrowers. A 2003 study from the Federal Reserve found that states with more onerous foreclosure laws had less available credit. Specifically, the down payments that were required in such states were 4% to 6% larger. This is a critical issue in California, a state with the second lowest housing affordability in the nation.
Of course, facts were no deterrent to lawmakers who prefer a few juicy anecdotes for sound bites. The ongoing condemnation of the robo-signing scandal completely disregards the fact that if borrowers had made their required payments there would be no paperwork in the first place. Casting the banks as the exclusive bad guys helps avoid the fact that many borrowers committed fraud by lying about their income on their mortgage documents. We are also asked to feel sorry for owners who are losing their homes without acknowledging that they took thousands of dollars out of their properties in the form of home equity lines of credit, and spent it.
Sadly, sound bite policies such as the CHRB will ultimately cost California’s future homebuyers.
Christopher Thornberg is an economist and founding partner of Beacon Economics.