Lenders in California now have to provide a 90-day moratorium on foreclosure proceedings where no effort was made to work with the borrower to modify the terms of a home loan under a new state law rolled out Monday.
But don’t expect automatic or immediate relief under the law, which was authored by state Sen. Ellen Corbett, D-San Leandro.
Lenders and loan servicers that already have a comprehensive and systematic loan modification program in place are exempt from the law. Such programs call for loans to be modified by lowering interest rates for at least five years, deferring or reducing part of the principal, or providing up to 40 years to repay the loan.
“The vast majority of them are already in compliance with some regulation or requirement, either through federal laws or voluntary efforts,” said Chris George, president of San Ramon-based CMG Mortgage Services and a board member of the California Mortgage Bankers Association.
By applying for an exemption, lenders will automatically receive a 30-day stay during which state officials will determine whether the company has a proper loan modification program in place.
“If they do not have a plan in effect, they will be (subject) to that 90-day moratorium,” said George.
The California Foreclosure Prevention Act was included in legislation passed in February that approved the state budget.
Paul Leonard, director of the Oakland-based California office of the Center for Responsible Lending, sees the state law working in conjunction with the Obama administration’s foreclosure plan that includes financial incentives made to lenders, loan servicers and borrowers who participate in loan modification programs.
“It’s a bit of a stick that will create incentives for the lenders and servicers to participate in Obama plan,” he said.
Lynda Gledhill, a spokeswoman for Corbett’s office, said there are no estimates as to how many homeowners facing foreclosure the state law might help.
“It’s hard to say,” she said. “We know there are more resets coming.”
While some people view loan modification programs as a way to curb foreclosures, studies have shown that people who participate in these programs often end up defaulting on their new loans. A report released in April by the Office of the Comptroller of the Currency found that 46 percent of borrowers who had their loans modified during the second quarter of 2008 had fallen behind 60 or more days in their payments after eight months.
The California Foreclosure Prevention Act law applies to first mortgages taken out between 2003 and 2007 for owner-occupied homes. CalHFA loans are not eligible.
The law is on top of separate legislation that requires lenders to wait 30 days before filing a notice of foreclosure after first making initial contact with a borrower who has missed several mortgage payments.
In Alameda County, the number of households that received some type of foreclosure notice in May stood at 3,018, a 19 percent decrease from a year ago, according to a report released last week by RealtyTrac.com.
Contra Costa County households received 3,378 notices, an 18 percent increase while in Solano County 1,480 households received notices, a 21 percent drop.
In San Mateo County, 730 households received a notice, a 40 percent increase from a year ago. San Joaquin County received 3,320 notices, an 11 percent increase.