90-Day Foreclosure Moratorium Kicks In Tomorrow

The new California Foreclosure Prevention Act is kicking in tomorrow (and stays in effect until January 1, 2011). Under the new rules, which apply to owned-occupied homes with first mortgages recorded between January 1, 2003 and January 1, 2008, the time period before a notice of trustee sale can be filed is extended by 90 days beyond beyond the current 3-month period (after a notice of default is filed).

A mortgage loan servicer may however be exempt from the rule if it can substantiate to the state that it has a comprehensive loan modification program in place. To be considered comprehensive, the loan modification program must show that:

• The loan modification “scheme” has a greater net present value (NPV) than what would would have been achieved through a foreclosure.
• Targets a debt-to-income ratio of 38% or less.
• Includes a combination of the following features:
  • deferral of some portion of the unpaid balance
  • extension of the loan term to no more than 40 years
  • interest rate reduction for at least 5 years
  • principal reduction
• Be a sustainable loan, long-term, for the borrower.

Personally, while I think these types of laws are put forth in good-faith, they are stupid. The part that gets me is the NPV calculation. From reading the bill, I didn’t see anything about how the NPV should be calculated.

I don’t have the exact figure, but I remember reading or hearing somewhere that the number of people in loan modification programs who fall back into trouble is something between 25-40%. Apply that to the return of the modified loan spread out over X number of years, and then compare it to the NPV of what you would get from a trustee sale and it won’t even be close – particularly if you have to extend the loan term out and lower the interest rate. This doesn’t even take into consideration income the bank would get if it had the opportunity to foreclose, bank the money and make a new and more-sound loan.

As a result, I suspect that either the lenders are just going to eat the extra 90 days and continue to foreclose, or put a program in place and try to skirt it and in the process create a lot of work and costs for the state.

Bottom line is that this law does nothing more than just continue to extend the housing recovery and the cleaning up of the banks. And this does nothing to address the fundamental problem of how people without jobs even manage to pay their loan, even if they do manage to get it modified.

Similar Posts:

• Unemployment Driving More Foreclosures Than Subprime
• The Seven New Mortgage Laws
• Mortgage Modification Talk Swirling
• January Unemployment Shoots to 10.1% in California
• Fannie Mae and Freddie Mac Lift Foreclosure Moratorium

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