Will Mortgage Bills Increase Cost of Lending?

A new study raises the question of whether the foreclosure and mortgage bills moving through the Legislature will increase the cost of lending and make it more difficult for the housing market to recover.

On June 27, a two-house conference committee approved California Chamber of Commerce-opposed SB 900 (Leno; D-San Francisco) and AB 278 (Eng; D-Monterey Park).

The bills are part of a package supported by the California Attorney General, called the “California Homeowner Bill of Rights.” Provisions of the bills would likely move the state closer to the type of lengthy judicial foreclosure process followed in places like Florida and New Jersey.

Despite amendments to the original versions of the bills, the continued lack of clarity would allow borrowers in default on their mortgages multiple opportunities to apply for a loan modification in order to forestall legitimate foreclosures.

Furthermore, the bills create attractive opportunities for litigation that would delay the foreclosure process over violations that may or may not have changed the outcome.

Conference committee chairs expect a vote on the bills on Monday.

The study, released June 28, concluded that the vast majority of California homeowners will not be helped by the bills.

Will Slow Housing Recovery

The analysis found that prolonging the foreclosure process would make it more costly for loan servicers, would be unlikely to help more than a tiny fraction of homeowners who are behind on payments, and would be likely to slow the housing recovery, ultimately reduce home values, and diminish the future availability of credit for California homebuyers.

The study was conducted by independent research firm Beacon Economics, LLC and commissioned by the California Bankers Association, California Credit Union League, California Mortgage Bankers Association, MERSCORP Holdings Inc. and United Trustees Association.

“However well intentioned, these bills are unneeded in a housing market that has just begun to find its footing and is starting to recover from one of the worst crashes in history,” says Beacon Economics founding partner and the study’s lead author Christopher Thornberg. “These kinds of interferences that lengthen foreclosure processes have been shown to do little for current borrowers who are behind on payments and can actually incentivize some to default, increasing foreclosure rates. They have also been shown to be detrimental to new borrowers because they result in reduced availability of credit.”

Foreclosures in California have already fallen from their peak, sales are beginning to trend upwards, and prices have risen off their 2011 bottom.

Judicial states have foreclosure timelines that are, on average, 2.5 times longer than non-judicial states, and a wide variety of research cited in the study shows important negative effects, such as delaying market recovery and incentivizing some consumers to strategically remain delinquent.

Other Findings

The study also found that provisions which prolong the foreclosure process:

  • Are unlikely to help borrowers who are behind on their payments. There is little empirical evidence to suggest that states with longer foreclosure processes have greater rates of loan modifications or a lower share of delinquent borrowers moving into foreclosure.
  • Will reduce home values. Allowing defaults to idle in the system keeps discounts high on foreclosed units, placing downward pressure on home prices across the board.
  • Will reduce the availability of credit for future homebuyers by raising the risk of lending in California, which will cause mortgage companies to toughen credit standards and increase the down payment needed to purchase a home. This will effectively reduce long-run homeownership rates in the state.
  • Could end up costing homeowners with distressed mortgages. An important aspect of non-judicial foreclosure processes is that they do not allow lenders to pursue borrowers’ other assets as compensation for mortgage losses. If the non-judicial route is made more costly, many lenders may choose a judicial foreclosure (which is their right), and seek reimbursement from borrowers’ other assets, costing financially strained homeowners even more.

Coalition Opposition

In a letter to members of the conference committee, a coalition of associations, including the CalChamber asked to continue negotiations on the bills, saying the measures “reflect an overly complicated approach” and “lack clarity around critical definitions.”