Thoughts On California’s Homeowner’s Bill Of Rights

After years of countless frustrating experiences with the banks, California’s legislatures, finally passed the Homeowner’s Bill Of Rights (SB 900 and AB 278) law making it illegal for banks to “double track” and “Robo” sign foreclosure documents.  It’s  very hard for us here at Law22, to adequately express how we feel about the passage of this law, because on one hand, this law is undoubtedly a step in the right direction and a much needed change to the lawless manner in which banks were treating thousands of struggling homeowners.

Upon the law’s passage, we couldn’t help but reflect on those countless times where frantic homeowners would call or come in to the office utterly confused about why they were being told that the modification application is being reviewed but are receiving foreclosure notices at the same time.  The worst situations were those where the poor homeowners naively thought the foreclosure process was “on hold” while their modification application was being reviewed, only to later find out that their home has been auctioned!

Yet, we cannot help but feel that this law is long overdue and does not fundamentally deal with some of the most frustrating aspects of the housing crisis.  The most notorious of which is the requirement that (in almost all cases) the banks will not even consider an applicant for modification until and unless they are at least several months delinquent on their mortgage payments.  If our experience tells us anything, it is that this unnecessary and sinister requirement has caused as many people to lose their home as any other factor in the housing meltdown.

Those cases almost always start in the same innocent and naïve manner: A homeowner who wants to keep his/her home, and can afford to do so in the short term, but are worried about long term, especially since their interest rate is nearly double the market’s rate or three times the rate of some of his friend’s modified rate.  So the homeowner embarks on an effort to modify the terms of the mortgage, and calls the bank to know how they can file the application, only to be told that such programs are only available for delinquent homeowners.  Some homeowners quit at that point, but many others take the bait, and intentionally miss their payment.

Months later, and after faxing their application a dozen times and resending the supporting documents countless times, the homeowner is told that, for whatever reason, they do not qualify for a loan modification.  Not only that, but they now have to pay all the delinquent amounts plus fees and interest in order to keep their home or else it will be foreclosed.  By that time, many homeowners would have spent the money that should have gone to the mortgage on other things (the homeowners fault) and even those who did not often do not have the extra upfront payments and the fees that need to be made (the banks’ fault).

The law on this needs to be changed.  If the banks are going to require that homeowners be delinquent on their mortgage before they are considered for modification, then the banks should offer those homeowners who do not qualify, some sort of step program or escrow account to help them become current again.  Or, at the very least, waive the penalties and fees if the homeowner is willing and able to become current on his/her mortgage again.

Unfortunately, President Obama has talked the talk on this issue but did not walk the walk.  Although he spent a lot of time talking about saving homeowners, and pushing Congress to “act” he has not taken any decisive measures against the banks to propel them to act.   Although given the nature of our constitutional system, the President cannot just do what he wishes and he certainly cannot pass laws on his own, but there is no doubt that he could have done way more to stand up for the American homeowner.  For example, he could have certainly tied the bailout funds with certain conditions and requirements that the banks had to meet when it comes to loan modifications.

Second, the President and Congress could have conditioned AIG’s bailout on a renegotiation of the terms of its derivatives insurance.  Put plainly, many of the bank’s had no financial incentive to work with the homeowner because most of the loans were insured by AIG, so when the bank forecloses, AIG (for example) would pay the bank the difference between what the bank originally loaned, and what the foreclosure sale yielded.  Now, here is the kick, where is AIG getting its money?  The American taxpayer of course, and just in case our memory is hazy, AIG received $125 Billion for 92% government ownership stake.  In other words, the American taxpayer owned the same company that was making up the losses for the banks that were foreclosing those same taxpayers’ homes.  Why were not any strings attached to the AIG bailout?

The point here is not to make a political judgment on what our government has done, but to merely highlight some of the lost chances that President Obama and Congress to help the average American out.  In any case, now that the banks have regained their losses and are making record profits once again, our government’s ability to influence them has undoubtedly waned.  But our government can at the very least threaten to establish government funded banks that can better serve the American consumer with lower interest credit cards, freer lending practices, and streamlined loans mortgages.  If the banks begin to genuinely feel like their monopoly may be in jeopardy then they may second guess their current strategies.