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Will a Foreclosure Moratorium in California Help?

Even with the lowest mortgage rates in California in 40-years, many homeowners do not qualify for affordable refinancing. In the Golden state, most California lenders foreclose outside of court. The bank tells a trustee, which may be an arm of the bank, that it’s time to foreclose, says attorney Pamela Simmons, a partner with Simmons & Purdy in Soquel (Santa Cruz County), who works for borrowers.   Because there usually is no court involved, the court documents allegedly robo-signed in other states generally don’t exist in California. But California and other states with non-judicial foreclosures are seizing on the headlines to propose moratoriums on other grounds. Not since the subprime mortgage crisis of 2006 have we seen so much disarray in the housing sector.  Most bad credit lenders have folded so homeowners have been reaching out to FHA lenders in an effort to refinance into a lower payment. There are more California homeowners that have an  under water mortgage than ever before since the State was incorporated more than a century ago.

Jerry Brown California Attorney General Jerry Brown has called on GMAC and Chase to stop foreclosing on homes in California unless they can immediately prove they are complying with a state law.

This law prohibits lenders from recording default notices on mortgages made between Jan. 1, 2003, and Dec. 31, 2007, unless the lender (with certain exceptions) first tries to contact the borrower to assess his or her situation and explore options.  However, a state appeals court recently ruled that the California mortgage lender in this situation does not have to say, “Here is the day and time I called the borrower,” it can just say it contacted them, says Roger Bernhardt, a law professor at Golden Gate University. In a victory for lenders, the state Supreme Court refused to hear the case.

Brown spokesman Jim Finefrock says “there have been discussions” with GMAC and Chase. “Both have been cooperative.”  Bernhardt would not be surprised to see state legislatures try to impose moratoriums, like they did during the Great Depression. California has already enacted two laws that delay foreclosures – one by 30 days and another by 90 days – beyond the traditional four months or more it takes to foreclose. “That’s the beginning of a de facto moratorium,” he says.

Mark Zandi, chief economist for Moody’s Analytics, told the Washington Post that document-processing problems could lengthen the foreclosure process for years and could have “macroeconomic consequences” if banks become unwilling to extend credit to households or to small-business owners who use homes as collateral.  Banking consultant Bert Ely says he hopes states “weigh the consequences” before imposing foreclosure moratoriums.   “If a foreclosure moratorium endangers the security interest the lender has in the mortgage, given that most mortgages are securitized and sold on a global basis, it would make it more difficult to put mortgages (from that state) into securitization pools unless they met really strict underwriting standards,” he says.

Posted in Bad Credit Mortgage, Published Article.

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