I received an interesting email from a real estate agent and have permission to share the following:
Well, fellow housing bubble bloggers and real estate news site editors, you may not have caught the significance and long-term implications of something buried in California’s Senate Bill 1137 that just passed.
I’m not talking about the potential $1,000 a day fine for lenders and/or the litigation costs to fight those fines that will burden banks trying to get top dollar on REO, thus causing them to start "dumping" REO at far greater discounts.
No, what I’m talking about are the implications of a little provision in this law that was passed a few short weeks ago that says a bank or mortgage servicer has a duty to its investors to offer loan modification terms that will yield a net present value that is greater than what would be achieved if a lender took back and sold the collateral.
Section 1(c) states:
Under specified circumstances, mortgage lenders and servicers are authorized under their pooling and servicing agreements to modify mortgage loans when the modification is in the best interest of investors. Generally, that modification may be deemed to be in the best interest of investors when the net present value of the income stream of the modified loan is greater than the amount that would be recovered through the disposition of the real property security through a foreclosure sale.
Now if you know what’s happening in the marketplace, you know that lenders are only offering 2-3 months of deferred payments, maybe a miniscule drop in interest rate if you had an above market rate in the first place, and a recasting of your mortgage, as concessions for a loan modification. Very few, if any, lenders are forgiving principal. None of this amounts to a payment decrease of more than 10% if anywhere near that, and nowhere near enough to prevent foreclosure.
You and I know that California property values have already dropped 20%+ and will drop far more given that the only sales now occuring are on foreclosures and short sales.
The point of all this is that this new law creates an underlying legal "cause of action" for homeowners against banks and mortgage servicers who do not offer significantly larger discounts on mortgage principal, because that’s what it would take to still allow banks and mortgage servicers to retain a higher net present value on the sale of foreclosed property. All things being equal, the bank and mortgage servicer still has at least 5%-8% in closing related costs, foregone interest (equal to another 5% to 10%) of the loan balance while the property goes through the foreclosure process and languishes on the MLS till it’s sold, and that doesn’t count the cost to advertise, repair, pay taxes, HOA fees, etc. on the asset during the REO holding period. So if property values have dropped 20% on highly leveraged assets, the case can be made that a 30% discount on mortgage principal will still net the bank more than if goes through the foreclosure process and is ultimately disposed of as REO.
Any homeowner who requests and can support through foreclosure sale comps, a 30% or greater discount on their mortgage, and is denied, and learns later that the foreclosed home sold for a price that netted the bank or mortgage servicer less, will now have a legal cause of action against that bank, it’s successor if the bank was sold, or the mortgage servicer, because they will have fallen short of what the law mandated.
Banks and mortgage servicers with collateral in California are now sitting ducks for any lawyer worth his salt who will now be able to secure massive discounts on mortgage principal for defaulted homes in California.
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