California Foreclosures: Lenders Must Accept Loan Modifications

[doodadem]

We are just now hearing about this new law, and plan to use it if we can. Any other Californians out there who have, and what was your experience? It sounds like the legislature screwed up and enacted a seriously consumer-oriented protection, but not many people know about it.

California Foreclosures: Lenders Must Accept Loan Modifications
By Michael Doan on Sep 8, 2008 in Foreclosure Defense, Foreclosure News, Mortgage Issues

http://www.mortgagelawnetwork.com/california-foreclosures-lenders-must-accept-loan-modifications/

A new law enacted on July 8, 2008, now requires Lenders of residential loans in the State of California to accept loan modifications in most foreclosure situations. California Civil Code 2923.6 went into effect on July, 2008, and applies to all residential loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences.
Practically all residential mortgages have Pooling and Servicing Agreements (“PSA”) since they were transferred to various Mortgage Backed Security Trusts after origination. These vehicles likewise almost always contain a duty to maximize net present value to its investors and related parties. Under the new laws, California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.

Essentially, California Civil Code 2823.6(a) states that “a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1) loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.”

Likewise, California Civil Code 2823.6(b) now provides “that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.”

So what does all this mean? Well, lets take an example:

John Martin’s loan is presently in default, or reasonably foreseeable of near default. The house he previously bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted to $375,000. While Mr. Martin can no longer afford the $9,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:

a) New Loan Amount: $330,000.00

b) New Interest Rate: 6% fixed

c) New Loan Length: 30 years

d) New Payment: $1978.52

While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account. Foreclosures typically cost the lender $50,000 per foreclosure. For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors. Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.

Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00. Thus California Civil Code 2823.6 would mandate a loan modification to the new terms.

The homeowner just got a new arrow to add to his foreclosure defense quiver. Pursuant to California Civil Code 2823.6, the lender is now contractually bound to accept the loan modification as provided above. Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court.
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[xchrom]

1. we need more of this kind of direct help to homeowners.

this is a good thing and will help stabilize california.

[truedelphi]

2. During the Great Depression, 24 states passed laws abnning foreclosures

That needs to happen now.

It is estiamted that 8 million homes will go into the foreclosure process over over the next year.

[PSPS]

3. (Un)fortunately, the law is cited incorrectly

First of all, this is in section 2923, not 2823. They probably did that on purpose to confuse you. Is this some kind of "debt farming" scam outfit?

First of all, if this were really true (it isn't), most people would be outraged, and rightly so. Who wants the taxpayer (where the bank would go for the deficiency) to pay for "John Martin's" $800K McMansion that he bought with his liar's loan, after which he then took out a second to buy the SUV, boat, cruise and the trophy wife's new boob job? I'm not interested in bailing out the scum. He should lose the house and rent like he should have been doing all along.

In any case, section 2923 was part of California's first 90-day moratorium on foreclosures -- their attempt to kick the can down the road. It has expired now. During the 90-day period, lenders were "encouraged" to renegotiate the loans provided the payments would not exceed 38% of the borrowers documented income. The property must already have had a NOS and it excludes borrowers who have surrendered the property or signed up with a "foreclosure-avoidance" outfit or have filed for bankruptcy.

The kicker is that this can only be done, "if such a modification or plan is consistent with (the bank's) contractual or other authority." HA!

If this website is claiming that, "the lender is now contractually bound to accept the loan modification as provided above. Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court," they're lying. There is nothing in the statute that is mandatory other than the 90-day foreclosure moratorium and it has expired anyway.

[doodadem]

4. I am still researching.......

But I did just find this:
http://info.sen.ca.gov/pub/07-08/bill/sen/sb_1101-1150/sb_1137_bill_20080708_chaptered.html
which appears to be the bill in its entirety. It says it is in effect until 2013.

Are you a lawyer???

[doodadem]

5. It looks like the 2823 was a misprint

They correct it further down in the article to 2923. When you google it, tons of info comes up, some worthwhile, some not so much.

However, where do you get the idea taxpayers are footing the bill for this? It is a reduction of principal, down to the property's current value, and then the 50K+ that the bank would put out to actually foreclose on a property. According to the atty. my husband was talking to about it, there are tons of these banks that are not following correct procedures, in their haste to kick people out of their homes.

I also did not see anything in the article about the example's personal situation. Most people that are looking down the barrel of foreclosure right now do not fall into your neat and tidy little explanation. We have lost jobs, lost health insurance, all kinds of reasons.

And nothing expires on this until 2013....at which time it can also be renewed.