California Goes Gangbusters Against Abusive Lending, Passes Sweeping Foreclosure-Protection Law

Hey, rest of the country that isn’t California! This is how you do it: California legislators went ahead and approved a sweeping bill on Monday that is basically a homeowner bill of rights, including ending abusive practices by mortgage lenders while at the same time helping homeowners evade the abyss of foreclosure. California ain’t kidding around.

While there are other states with similar legislation, this is among the most ambitious of its type in the nation, notes Reuters. It would prevent banks from “dual-tracking” — moving forward on foreclosures during the process of negotiating with homeowners over loan modifications.

As we reported before, lenders who reject a modification would also be required to provide a clear explanation for the denial. And if the process gets to the foreclosure stage, the lender would need to verify all related documents — and provide the homeowners with copies if requested. Filing unverified documents could result in fines up to $7,500 per incident.

The law would also provide for lawsuits against robo-signing, which is when foreclosure documents are signed in a big bunch without any sort of review. Big banks were already smacked with a $25 billion settlement over that practice as well as others as the result of a multi-state foreclosure lawsuit.

Governor Jerry Brown is expected to sign the legislation in the coming days.

California has been hurting especially hard from the housing meltdown, which makes this legislation quite a bright spot for the state: Last week the city of Stockton became largest U.S. city ever to file for bankruptcy, partly due to the nation’s housing collapse.

Previously: California Lawmakers Move Forward With Homeowner Bill of Rights

California lawmakers approve foreclosure-protection law [Reuters]

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  1. incident-man stole my avatar says:

    Will it prevent loan officers from giving loans to people who don’t qualify? That would go a long way to preventing foreclosures!

    • StarKillerX says:

      But that would be discriminatory.

      • PunditGuy says:

        It’s only discriminatory when you apply different criteria to people based on their skin color or where they live. If you don’t want to do any actual underwriting, you don’t have to — but you can’t magically come up with loan criteria for just your black customers.

        • StarKillerX says:

          Yeah, that looks good on paper but reality isn’t as clear cut.

          The President and Congress pushed the Fed and banks for more and more mortages to low income people and claimed that not doing so was discriminatory because minorities were effected at higher rates. The problem is this was not due to race but economics. As blacks are more likely to be low income them whites it makes perfect sense that granting, or not granting, loans to low income people will have a greater proportional effect on blacks.

          • PunditGuy says:

            It was put on paper because it was actually happening.

            And if you’re not going to ask a suburb dweller to prove income, you don’t get to make inner-city folk prove income either. That’s the point. Mortgage originators were more than welcome to deny loans to both.

            • scantron says:

              For a mortgate a suburb dweller most certainly must prove income. Are you daft?

              • PunditGuy says:
              • FatLynn says:

                I was just approved for a refi with no income verification.

              • who? says:

                I’ve been approved for a refi without income verification, more than once. It happens all the time. Not every time in every circumstance, of course. What Pundit is saying is that the criteria for deciding whether or not to do income verification is supposed to be consistent regardless of race or zip code of the borrower. It hasn’t always been.

                • Firethorn6 says:

                  I’d say that there’s a big difference between a refi that normally reduces monthly payments and getting a NEW loan that’s a massive amount of new debt.

                  If you’re current on the existing loan, the refinancers know you’ve been getting enough money to do that somehow. Effectively your ability to pay has already been verified. Unless you’re in a wierd situation, and even then you’d most likely be defaulting on the original load anyways.

        • physics2010 says:

          No, that would be racial discrimination.

          • physics2010 says:

            edit: This was in reply to PunditGuy. Someone said discriminatory, and PunditGuy immediately gave the definition of racial discrimination. There are other types.

          • PunditGuy says:

            “or where they live” — redlining was one of the reasons why regulations were needed in the first place.

      • Jawaka says:

        Discriminatory towards less well to do people?

        They’re a protected class?

    • ChuckECheese says:

      Unqualified borrowers weren’t the main reason the economy crashed and burned. The main reason is because banks issued mortgages to people who couldn’t afford them for inflated property values, then sold these mortgages off to investors. The banks were the primary actors in this scheme, falsifying borrowers’ financials to make them appear mortgage-worthy when they weren’t. Nice try blaming the victim though.

      • PunditGuy says:

        Soooooo close. You had me until “victim.” Accomplice would be more apt.

        • JEDIDIAH says:

          The mortgage bubble was just the tip of the iceberg. It required that mortgage lenders be able to resell their bad loans. This is what allowed mortgage brokers to create bad paper with no consequences. Although the real problem is that this junk paper was resold under false pretenses.

          It’s that nonsense that caused the rest of the economy to melt down. Once people realized that the bond rating agencies could not be trusted, the entire financial sector ground to a halt. People and companies that didn’t have anything to do with bad mortgages found money and credit drying up.

          Junk being rated AAA is what ultimately sent things over the edge.

        • ChuckECheese says:

          It has been demonstrated that people were given mortgages they could not afford, and were only notified of their monthly (pre-rate adjustment) payment amount, and so thought they could afford the mortgage. They were not notified that the bank was faking the docs, or that the initial payments were interest only. The onus is on the bank to make certain they do not lend money to people who can’t pay it back. And when the bank falsifies the loan application data to make a person appear to qualify for a mortgage, it is the bank’s doing, not the homeowner’s. And yeah, you better believe victims. This banker bullshit made victims of hundreds of millions of people around the globe.

          • FatLynn says:

            Let me also point out that these things are extremely complicated, and written in legalese. There is no reason to expect the average person would understand all of the nuances, so the average person has to trust his mortgage broker/realtor/lawyer, and in many places, all of these people were acting in cahoots to crank out as many deals as they could.

            • who? says:

              Exactly. When I bought my first place, my first step was to go to a mortgage broker. She asked me some questions and did some magic with her calculator, and a number came out the other end. “This is the maximum you can qualify for.” She was the expert, and I trusted her. If she told me anything else, I didn’t understand it, and don’t remember it now. So I went out and found a place that cost the amount she gave me. I was barely able to make the payments for the first couple of years, but since it was 1990, it was a fixed rate, 30 year loan. After the first couple of years, I had gotten a couple of raises, and I was able to actually afford the place. If some banker or mortgage broker had put me in a 2/28 loan, I would have been foreclosed as soon as the teaser rate ended.

              The next time I bought a house, I was a much more sophisticated buyer. I understood things like loan terms, interest rates and teaser rates, and was able to make much better decisions without “help”. But most first time buyers are more like I was in 1990, and if someone is trying to take advantage of the situation, the buyer is the one who is going to lose.

              • Firethorn6 says:

                You know, I pretty much ignored the ‘maximum you can qualify for’ amount precisely to avoid what you experienced? They’d have loaned me around a quarter million dollars. I ended up getting a loan for about half that.

                End result: 15 year mortgage instead of 30, and the resulting lower interest rate means payments are STILL lower than they could have been.

      • dangermike says:

        “Unqualified borrowers weren’t the main reason the economy crashed and burned. The main reason is because banks issued mortgages to [unqualified borrowers], then sold these mortgages off to investors.”

        Lending to unqualified borrowers was a key reason for the crash. Not the root cause, but a key factor. Millions of us who wanted to buy a place to live stood aside because the only way to afford anything was to sign up of Option ARMs or interest-only programs where it was known and disclaimed up front that the payment would increase significantly at the end of the voodoo-mumbo-jumbo period at the beginning of the loan. I refuse to believe the vast majority of foreclosure “victims” are victims of much more than their own short sided avarice.

        That said, absolutely, the lenders writing the garbage loans are also at fault, as are the ratings agencies that called the mortgage backed securities for Alt-A and other risky devices anything better than junk, and so is the Congress, Federal Reserve, SEC, and all governmental bodies who created the conditions to inflate the bubble, and who allowed the bubble to continue to grow when it was plainly evident what was happening, and who, even now, falsely claim to have had no way to tell.

        • RvLeshrac says:

          Except for the fact that many loan and mortgage officers knowingly hid or downplayed the ARM rate increases, you’re right. She shouldn’t have been walking down the alley in that dress.

          Oh, wait, what were we blaming the victim for, again?

          • Firethorn6 says:

            I’d basically reverse the faulting – it’s still somewhate the buyer’s fault for falling for those financial instruments, but the vase majority of the blame falls on the virtual(and outright in some cases) fraud artists who deceived them. The resulting upward pressure on home prices squeezed a lot of people in my generation badly; just looking to get homes, but because of the segment buying homes they shouldn’t have been able to, that put upwards pressure on home prices and market – they bought the cheapest 25%, pushing the lower-middle class who would have bought them into the next 25%, etc… Market forces were reacting – look at the home building boom.
            The increased expense made even solid traditional home buyers strain to afford their purchase, making everything more risky.

          • dangermike says:

            Your metaphor doesn’t work. The real estate and banking industry were like David Koresh and the foolish buyers all the Branch Davidians. In the end, they all burned. And we can even point out that the government was guilty of negligence and ineptitude in that encounter, too.

            I’m not blaming the victims. I’m blaming the coconspirators. The only victims in this case are all the honest, hard-working tax-payers and who had the sense to avoid getting caught up in the bubble frenzy and the innocent young people who never got to enjoy the ride but have to pay for it anyway in higher taxes, less social mobility, and a broken real estate market.

        • mianne prays her parents outlive the TSA says:

          Also, remember there was a housing boom at the time. Stories were constantly on the news, on reality tv, and everywhere else about buying a house for $100,000, putting on a fresh coat of paint, and then flipping it 3 months later for $300,000.

          So the unsophisticated first time home buyer learns their mortgage payment will be $500 for the first couple years, and then the rate will reset to $3000 per month, “Oh, but don’t worry! The rate of home value appreciation is such that by then, you’ll have enough equity to refinance the loan back down to the introductory rate or less!”

          Two years later, they find they have negative equity in the house as the value plummeted, and can’t qualify for refinancing. Their lender refuses to modify the terms of the original loan, won’t authorize a short sale, and forecloses on the property.

          Epilogue: The buyer loses their home, the investors who bought the AAA-rated loans are out most of their money, and the bank execs pocket millions in bonuses.

          Sure you can blame the victims all you want, “The buyer did not do their due diligence before signing off on the loan.”, “The investors have to accept that their portfolios may lose value.” But it was the bankers who knew they were making worthless loans from the start, and knowingly misrepresented them to their underwriters. Instead of going to jail for fraud, gross negligence, and embezzlement; they’re buying mansions, yachts, and federal regulators by the gross!

    • ChrisC1234 says:

      When I was buying my house, I will never forget what the loan officer told me. She said that knowing that someone will not pay back the loan is NOT a valid reason to deny them the loan. She said there were people that came in, met all of the criteria, but they knew that the people taking out the loan would never pay it back.

      • RvLeshrac says:

        How did they “know” that the people taking out the loan wouldn’t pay it back?

        Are they playing the lottery with that psychic insight?

    • LendingInLA says:

      As a loan officer myself for the past 8 years, I can tell you that there are no longer loans available for people who can not prove enough income to pay them back and support that with good credit. There are a couple of refinance programs out there that do not require proof of income. One is the FHA Streamline refinance. For that loan you must prove that you have been making your payments on time, there is a minimum credit score required and you must prove that you are employed. On top of that the loan must also lower your payments by at least 5%. The thinking is that if you have been able to pay the loan on time for the past 12 months you should be able to continue paying it if the payment is lowered. The benefit for the banks is that most FHA borrowers are underwater and they want to provide an inscentive for those people to stay in their homes rather than walk away when they owe more than the home is worth.

      The lending landscape has changed dramatically for the better. Increased licensing requirements have run fly by night lenders mostly out of the business, and anyone who got a loan after 2009 has had to prove they could afford it. The beginning of the foreclosure boom was due to shady adjustable loans and loans that people didn’t have to qualify for (stated income loans). The reason for most foreclosure these days is the high rate of unemployment and people voluntarily walking away from homes that are way underwater.

      Bill Clifford
      Open Mortgage
      bclifford@openmtg.com
      NMLS ID 289148

  2. Upthewazzu says:

    They should call this the Protection of Property Tax Act.

  3. ferozadh says:

    Modify the loan again. You know this hurts me more than it hurts you. Now clean it up!

  4. MCerberus says:

    You know, this is a good idea for the US congress if they want to boost their image. The only way it seems they could do this (other than not being corrupt) is to pick on the only institutions less people like than them.

  5. FatLynn says:

    I know people will show up here and yammer about personal responsibility, but keeping people in their homes is good for everyone.

    • PunditGuy says:

      Just homes? Any other property you should be able to keep without keeping up on your contracted payments?

    • CrazyEyed says:

      Not saying any one party in particular should take the blame but keeping a home you can’t afford hurts you, the lender and the investor. A home simply dropping in value is not enough for a modification or a reduction in payments. Equity is a risk. Those who legitimately take paycuts as a reason for hardship make more sense for a reduced payment to keep their home. A loss of job all together is not the fault of the bank, but approving someone for a $500,000 home on a $20,000/year income is. As a person who’s been employed in many facets of mortgage servicing, more often than not, people feel entitled to keep their homes and economic logic is thrown out the window. So yes its about personal responsibility, both by lender and lendee.

      • FatLynn says:

        Right, when I said “everyone”, I meant more of the people who show up to say “I make all my payments on time. Where’s my handout?”. Believe me, if you are a responsible homeowner, you do NOT want a foreclosure in your ‘hood.

        • CrazyEyed says:

          You’d be amazed at the number of people looking for handouts. When I worked in CS at BOA in the mortgage department, we’d get thousands of calls from people looking to get their modification once Obama came out with the Making Home Affordable Modification Program (MHAMP). 90% of the poeple who called didn’t express any form of hardship or difficulty; they just wanted to see if they could get a modification. It was actually kinda funny when we asked them what their hardship was, they would pause and think. Problem is, you also have to prove it after a consultation over the phone by sending in financials and most of them skipped that stuff. I know I know, there’s all kinds of stories out there about people sending in financials and financials getting lost but what you don’t hear reported often is that many people couldn’t follow simple directions either and missed deadlines. It all comes back down to personal responsibility. Unfortunately the banks and the borrowers have lacked that in a time where it matters most.

    • Costner says:

      There are a lot of assumptions made here. Keeping someone in a home benefits that person sometimes, but other times they are trying to hold on to an emotional bond that they simply cannot afford.

      For instance if a married couple buys a home and raises three kids in that house, and then one day the husband dies leaving no life insurance and the wife can no longer afford the payments…. she will probably want to keep the house because of the emotional bond. Yet she will struggle and suffer from the stress and anxiety each month when that payment comes. Is it really in her best interests to keep it?

      Also, what about the honest mortgage lender out there? I know we like to focus on the crooks and the bad examples, but most mortgages in this country are on the up and up. So what about a bank who loans someone money at a fair rate and under fair terms, and then five years later that person decides to stop making payments for no valid reason. Should the lender be required to modify their mortgage or bend over backwards to keep them in their home even if it means the lender will be forced to take a loss on the loan? Is that fair?

      I hope these types of laws do some good, but I can almost guarantee the interest rates and fees surrounding mortgages will now need to be adjusted upwards to cover the increased cost to the lenders. This means home ownership will remain out of the grasp of many because the costs just went up.

      • FatLynn says:

        Yes, I used too broad a brush, definitely. I’m not saying that everyone should keep their home regardless of situation, but rather that foreclosures have a widespread impact on a variety of people:

        1) The homeowner, who has nowhere to live.
        2) Neighbors, who find their property values falling.
        3) Renters, who are now competing for a smaller number of housing units (rents are way up in my area, while lots of condos sit vacant).
        4) The bank, who has a useless piece of property.
        5) The courts, sheriff, etc., who have to deal with all of this instead of more important things

        • CrazyEyed says:

          Very true. Foreclosures are bad for nearly every party involved. At the same time, trying to stay in a home you cannot afford will cause greater stress and headaches, prolonging the agony. Unless something happens where your financial situation changes drastically, don’t dig a deeper hole. Get out while you can, preserve some dignity and start over within your means.

          • Firethorn6 says:

            You actually saw some of this during the meltdown – ‘strategic defaults’ on seriously underwater homes. The people, with good/decent credit, would stop making payments – while purchasing another home. They’d get good/decent terms on a MUCH cheaper home(often of the same or better size/quality due to the crash), and voluntarily take the credit hit from defaulting.

            Others would stop making payments while still living in the house until the last moment of eviction, then move into a place they paid cash for. 2 years@$2k/month is a good downpayment.

  6. Tiercelet says:

    The law would also provide for lawsuits against robo-signing, which is when foreclosure documents are signed in a big bunch without any sort of review.

    If by “signed” you mean “forged” then yes, this is an accurate description.

    • CrazyEyed says:

      Robo-signing is often used (and misused) by the media to get attention.

      Forgery is signing a document in the name or likeness of an individual fraudulently for deception. Robo-signing is completely different and overused to create outrage well after a borrower has already defaulted and is deep into the foreclosure process.

      An employee of a mortgage servicing company that signs foreclosure documents without reviewing them is a robo-signer. Rather than actually reviewing the individual details of each case, robo-signers assume the paperwork to be correct and sign it automatically, like robots. Its a problem with the process, not the signature. The whole foreclosure could be valid, but if they (attorneys) don’t double check the banks avidavits, chain of title etc, there’s a risk for error. Still doesn’t negate the fact that the borrower is in foreclosure and in most cases isn’t the reason people get foreclosed on.

      • Tiercelet says:

        “Forgery is signing a document in the name or likeness of an individual fradulently for deception.”

        “Robosigning is… sign[ing] forcelosure documents without reviewing them…”

        The documents in question are typically affidavits asserting, among other things, that the robosigner has reviewed all of the documents in question and verified that they are in order. Furthermore, robosigners are frequently told to sign using a name other than their own. That fits *your own* definition of fraud.

        Further, these are documents which assert ownership of the mortgage on behalf of a particular bank. This determines who has standing to foreclose — i.e. who gets the house. I pray that you understand what a huge problem it is when we have banks producing unreviewed documents asserting ownership of people’s mortgages. We have people signing documents asserting that the banks’ record-keeping is all in order, when they haven’t even *reviewed* those records, and the records themselves are often sketchy to nonexistent. Creating a legal document and submitting it to a court is forgery. Creating imaginary dates on contracts* is also forgery.

        These things are crimes. The only reason they aren’t recognized as such is because of the risk to the banks if we actually faced the facts.

        * another major area robosigning is used is in creating false paper trails asserting that a mortgage has properly changed hands every time it’s been sold. That paperwork wasn’t kept up at the time, and New York law (the law that governs most of the big mortgage securitization deals, because that’s where Wall Street is) says that you can’t make the paperwork up after the fact, *even if your records are correct*. Maybe this seems like legal hairsplitting, but it’s set up this way for a reason: if you allow after-the-fact documentation of transfers, you can easily wind up with a situation where multiple parties claim the right to foreclose on the same property. What’s Joe Homeowner to do when BofA and Wells *both* try to foreclose on the house?

        • CrazyEyed says:

          Yes I am familiar with the process. I’ve worked in both the current and default spectrum of mortgage and with the largest foreclosure firm in New York State in the title department.

          Neither fraud or forgery is right, but I can assure you that whenever there’s an issue with ownership or title, its almost nearly the fault of the banks or the investors who exchange mortgages like baseball cards. Regardless of who actually holds the note, thats completely independent of a homeowners responsibilities to stay current with their mortgage.

          Banks need to do a much better job at recording and endorsing when mortages change hands or terms change when borrowers get modificaitons, but thats where a good legal operation comes into play. I can’t tell you how many times we (when I worked for a foreclosure attorney’s office) had to record documents on the banks behalf because they didn’t bother doing so. At the same time NY State changes its foreclosure laws frequently so what may be legal now may change in a few months. Still doesn’t invalidate the foreclosure, but it can delay it significantly as the attorney has to clean up the mess or do extra leg work as the laws change.

          In summary there’s still a problem with the process but nearly every argument I hear about faulty foreclure work completely negates the borrowers responsibility and focuses on the sensationalist media stories that don’t actually understand the process. Sure you might be able to detect shotty title work, but regardless of how many times notes changes hands, your money would have been better spent staying current than forking it out for a lawyer whos going to point out some inconsistencies that will prolong the foreclosure, but not invevitably save the home.

          Sure there’s some shotty operations out there. Many times servicers fk up but working in the industry on both sides ignorance and laziness is the biggest culprit (besides a true hardship) and not the foreclosure process.

          I’m still wondering where your imaginary dates come from though. And what ‘contracts’ do you speak of? The only contracts you sign are origination docs or modification/workout option paperwork. Dates simply aren’t made up. Nearly every foreclosure document is mandated by the state of new york and is designed to give the homeowner more than enough time for a response. New Yorks average foreclosure timeframe is nearly 3 years. Surely thats more than enough time to either get current or clear up the chain of ownership.

  7. trumpethead says:

    Yeah, keep blaming the homeowners. This had nothing to do with the toxic-exotic mortgage products the banks designed specifically to market to people with lower incomes and even the middle class. They were designed to blow up and become unsustainable. They were designed to create fees and profits at every turn. Then they were aggressively marketed. You couldn’t listen to the radio or watch TV for 5 minutes without having an ad in your face.
    “Get a home equity loan and buy a new car.. pay off those credit cards.”

    But that doesn’t fit in your little corporate/conservative talking point narrative. Keep believing that the borrower was just stupid, and lazy, and poor…
    Thank you California for stepping up and holding these fraudsters accountable.
    No one should have to lose their house because a bank played both sides of the Loan mod/ foreclosure game or got some $6/hr mail clerk to robosign a foreclosure document.

    • PunditGuy says:

      That’s a mishmash of nonsense. Yes, homeowners were not to blame for the economic meltdown — but they most certainly acted stupidly, and were complicit in their part of each mortgage deal. They should absolutely lose a house that they had no way to pay for and can’t pay for.

      Advertising made them do it? They were powerless to resist the siren song of the ads! Please.

      • RvLeshrac says:

        They were powerless to resist the *FACT THAT EVERY SINGLE EXPERT THEY SPOKE TO TOLD THEM REPEATEDLY THAT THEY COULD AFFORD THE PAYMENTS ON THE HOUSE FOREVER AND DIDN’T ACTUALLY NEED TO WORRY ABOUT THE ARM RATE INCREASE BECAUSE IT WOULD NEVER HAPPEN*.

        Why is it so difficult to understand that the majority of these people were outright lied to by mortgage brokers whose salaries, promotions, and commissions depended heavily on pushing customers into ARMs they couldn’t afford?

        • PunditGuy says:

          I sat and read my mortgage refi in 2006, to make sure that the terms matched what was being told to me. Spoken words are pretty, but they’re not in a contract. Everyone was bored, including me, but I got through it.

          So every single “expert” — people with a financial stake in getting people to sign — told them that financial unicorns would crap gold bricks, and they were powerless to resist. Bull. Common sense needs to rule at some point, otherwise used car salesmen would rule the world.

          • Firethorn6 says:

            Pundit, I’m guessing your IQ is over 100. Like you, I actually READ said documentation, but from the reactions of my agent and the loan official, it was highly unusual. In addition, I’d say that they were written on a 12+ grade level for comprehension – and there’s a lot of adults out there stuck at 10 or less.

            For me, common sense is that when you’re talking about legal-conmen, it’s that they’ll deliberately seek out those most vulnerable to their game. They deliberately write the contract to make it painful for these people to attempt to read. They structure their advertising to look good for them, they make all the *verbal* assurances in the world, etc…

            Basically, If one person falls for it, I blame the person. If hundreds, thousands do, I blame the professional in the situation.

        • CrazyEyed says:

          Thats a load of popycock. If you get an ARM loan the name says it all: Adjustable Rate Mortgage. Nothing is forever on an ARM. It can go up, it can go down. That is drilled into your head on nearly every origination document you sign on an ARM loan. There are all sorts of aknowledgements you HAVE to read, confirming your knowledge of the risks involved. Those who were burned by ARMs are very bitter and will look for excuses when they face tough times.

          I won’t deny ARM’s got pushed onto people via lax lending regulations that enabled low income borrowers to obtain loans, but if you believe that your ARM loan will never increase nor decrease, then I don’t feel sorry for you when it increases beyond your ability to pay it.

    • CrazyEyed says:

      Someone’s a little paranoid. It’s just one big corporate conspiracy. If you are looking to blame someone, blame the Clinton Administration for softening up lending regulations because, “Everyone should own a home.”

      • trumpethead says:

        Blame Clinton… really?

      • TurboGLH says:

        It’s weird to me, since we hear constantly how the key to growth in the country is less regulation. Give business’ more leeway and they will provide the jobs and growth we need.

        Instead, we give them some slack and they choke not just themselves but the rest of us as well. It reminds me that most regulation was put in place not capriciously, but after industry showed us as a country the would do the “wrong” thing when given the opportunity.