Blaming The CA HBR

Several readers have suggested that the CA Homeowners Bill of Rights has been the cause of the slowing foreclsoure activity – and now Barclays agrees.  From dsnews.com:

The California Homeowner Bill of Rights (HBR) is the main driving force behind the recent slowdown in foreclosure sales and short sales in the Golden State, according to a research report from Barclays. In addition to stalling the foreclosure process, provisions in the new bill, which took effect January 1, 2013, have also led to an increase in litigation risk for servicers, analyst at Barclays found.

According the report, short sale activity and foreclosure sales have been dwindling over the past few months, as indicated by foreclosure-to-REO and foreclosure-to-liquidation roll rates. At the same time, roll rates in other states appear to be steady.

As a result of the HBR, Barclays believes “servicers have become significantly more cautious when carrying out foreclosure sales” in the state.  While the bill offers several protections to homeowners, one particular provision that allows borrowers to sue servicers for “material violations” of HBR could result in additional costs for servicers.

Violations of the HBR include dual-tracking, failing to provide a single point-of-contact, and neglecting to deliver proper notice of loss mitigation options.

The report explained that prior to a foreclosure sale, homeowners can seek injunctive relief to halt the foreclosure process. If a homeowner secures an injunction, the borrower can pass all legal costs to the servicer through the HBR, even if no material violation of the HBR is proven later, the report explained.

“Our understanding is that securing an injunction may require only a declaration from the borrower that a material violation of the HBR has occurred and some reasonable justification for further investigation into the alleged breach. It is possible that multiple consumer rights attorneys will offer their services on a contingent basis to borrowers facing foreclosure, effectively providing the homeowner with a zero-cost option to pursue litigation,” the report stated.

banks working the systemIf the request for an injunction is granted, legal costs could easily rise to the thousands as the court looks into the allegations. The process could also add another 6-12 months to the foreclosure process, according to the report.

“Furthermore, borrowers are much more incentivized to demand a copy of the promissory note, the chain of mortgage assignments, and the borrower’s payment history to collect evidence that a breach of HBR occurred, further stalling the foreclosure process,” the report explained.

Even though California is not a judicial state, analysts suspect the increase in litigation risks and the extended foreclosure timelines might cause servicers to pursue more judicial foreclosures, which are exempt from the HBR’s provisions.


More Foreclosure Lawsuits Expected

California’s Homeowners Bill of Rights will add an estimated $30,000 of legal exposure into each and every non-judicial foreclosure, according to a white paper released by Robert L. Jackson and Associates.

Intended to educate loan servicing professionals and the financial institutions that hire them, the white paper states that the new law will change long-standing legal doctrines in the state.

morelawsmakingamessofforeclosuresThe new law will also make compliance with its provisions nothing more than a very expensive defense to borrower claims of wrongful foreclosure, the white paper stated, while encouraging such claims through its private right of action.

“The industry’s focus on procedurally complying with the Homeowners Bill of Rights is misplaced,” said Scott J. Jackson, executive vice president of the firm.

The white paper concludes that the Homeowners Bill of Rights “effectively kills” the non-judicial foreclosure process it originally intended to reform. The paper states that the new law makes judicial foreclosures a cost-effective and time-efficient alternative.

“The new law strips away protective legal doctrines that an entire generation of servicing professionals have come to rely on, making it much more difficult and significantly more expensive to resolve claims brought under the new law,” Jackson said.


California Going Judicial?

The Homeowner Bill of Rights launched in California not only changed hundreds of years of real estate law, it may have turned the West Coast state into a judicial foreclosure state with financial firms on high alert, legal experts claim.

“In California, they just gave trial lawyers a nuclear weapon to use against the industry,” said Bob Jackson, president and attorney at Irvine, Calif.-based Jackson & Associates. Jackson spoke at HousingWire’s REperform Summit, a mortgage servicing conference under way in Dallas.

“The Homeowner Bill of Rights is the most massive change in the last 100 years of real estate law,” he said. “It used to be servicers were in the business of enforcing simple contract law. What the loan servicer did is they enforced the contract, but that is no longer how the game is played.” The bill of rights, which was legislation designed by California Attorney General Kamala Harris, gave borrowers standing to legally address violations of the new foreclosure legislation.

The law bans dual-track foreclosures, requires single point of contacts for distressed borrowers and imposes civil penalties for the filing of multiple unverified documents, otherwise known as robo-signing. The robo-signing provision essentially means a law firm cannot file a notice of default or another foreclosure-related action unless a servicer has reviewed the filings to verify them, Jackson said.

With any document misstep leading to the possibility of litigation, Jackson said the hedging strategy would be to file judicial foreclosures, bypassing the common practice of nonjudicial foreclosures in California.

Jackson said the bill created several new areas of concern for servicing shops. The first is the potential to be sued for wrongful denial of a loan modification. Firms also can be sued if a loan modification was denied because of a mistake made in the process.

“You need to start looking at your foreclosure timelines,” Jackson said. “Judicial foreclosures get rid of 80% to 90% of this stuff.” He asserted, “[T]he bill will turn California from a nonjudicial foreclosure state to a foreclosure state.” Jackson noted that Arizona and Oregon are currently considering similar legislation.


NSDCC Distressed-Sales Gap

The gap between SD distressed and non-distressed pricing appeared to be widening yesterday.

Can we get a glimpse of what to expect for the rest of the year by analyzing the current pendings and contingents? How do they look around North SD County’s Coastal region?

We only have the list prices to consider, but you can see that the gap is substantial.

Detached-Home Pendings and Contingents in NSDCC

Town or Area # of Non-Dist. LP Avg. $/sf # of Distressed LP Avg $/sf

Will lenders ramp up their short-sale approvals to close out the books for the year?

It would make sense, especially with the California Homeowners Bill of Rights taking effect on January 1st, which will give homeowners (and their attorneys) more tools to fight.  If you are selling, it would be a great time to lower your price to sell now, before nearby distressed-sales start closing around you.

For those who have specific concerns about where these properties are located, here are the lists of detached short sale and REO listings that are pending or contingent. Note that the days-on-market meter does not stop running until a contingent listing is put into pending:

List of Pending and Contingent REOs and Short Sales
List of Pending and Contingent REOs and Short Sales – CDF-ENC-CSBD

Are Banks Foreclosing?

We’ve gotten the feeling that banks aren’t pursuing defaulters much after hearing anecdotal evidence about homeowners who aren’t getting calls from their banks and servicers, even though they’ve been behind in their payments for over a year.

Here is supporting evidence, a review of the 7,000 clients at youwalkaway.com, seen at mish’s site:


Once the California Homeowners Bill of Rights takes effect on January 1st, banks won’t be able to file a foreclosure notice until all loan-mod attempts have been exhausted – which would give them permission to let everyone ride.


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. 

From HW:

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?


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.

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