How the California Homeowner's Bill of Rights Is Affecting Foreclosures
It's no coincidence that the foreclosure rate in California has dropped significantly since the Homeowner's Bill of Rights went into effect in January, 2013.
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Fewer homes in California are entering the foreclosure pipeline in the wake of the Homeowner Bill of Rights, a new law that went into effect on January 1, 2013. The law reforms some aspects of the California nonjudicial foreclosure process.
Keep reading to find out why the Homeowner Bill of Rights is drastically affecting the number of foreclosures in California and how it could potentially change the landscape of foreclosure in the state.
(To learn more about foreclosure in California and special laws governing foreclosure, visit our California Foreclosure Law Center.)
What Is the California Homeowner Bill of Rights?
The Homeowner Bill of Rights is part of California Attorney General Kamala D. Harris’ response to the mortgage foreclosure crisis of the late 2000s. It largely came about as a result of the national mortgage settlement between 49 states and certain lenders. (Learn more about the national mortgage settlement.)
However, whereas the national mortgage settlement only applies to the five settling banks and their customers, the California Homeowner Bill of Rights extends the reforms to almost all mortgage lenders and servicers.
Key Reforms in the California Homeowner Bill of Rights
The purpose of the Homeowner Bill of Rights is to provide protections for homeowners facing foreclosure and to prevent the type of mortgage servicing misconduct that has been commonplace in the industry over the past few years, such as robo-signing. It aims to ensure that homeowners are considered for, and have a meaningful opportunity to obtain, available loss mitigation options, such as loan modifications or other alternatives to foreclosure. (See our Alternatives to Foreclosure area to learn more.)
The law imposes additional notice requirements, prohibits certain actions, and regulates the loan modification process. The four key reforms of the Homeowner Bill of Rights are:
- no dual-tracking (where a servicer is simultaneously evaluating a borrower for a loan modification or other alternatives while at the same time pursuing a foreclosure on the property)
- lenders must provide homeowners with a single point of contact in the loss mitigation process
- civil penalties are imposed for robo-signing, and
- homeowners have the right to sue for injunctive relief or actual economic damages for violations of the law. (In addition, if the court finds that the violation was intentional, reckless, or resulted from willful misconduct, the court may award the borrower the greater of treble actual damages or statutory damages of $50,000.)
To learn more see California Foreclosure Protection: The Homeowner Bill of Rights.
Major Slowdown in California Foreclosures in Early 2013
According to real estate firm DataQuick, lenders filed 18,567 notices of default (the first step in California’s formal foreclosure process) on California houses and condos during the first three months of 2013. This constitutes a 51.4% drop from the previous quarter and a 67.0% drop from the first quarter of 2012. In fact, the number of California homes going into foreclosure fell to the lowest level since 2005.
Decline Largely Attributed to the California Homeowner Bill of Rights
While other factors such as rising home prices and an improving economy may have also contributed to the drop, it’s no coincidence that the California Homeowner Bill of Rights went into effect on January 1, 2013, right at the time that the foreclosure numbers plunged. This new law is most likely the primary reason for the slowdown since it increases the risk of litigation for mortgage servicers. Accordingly, servicers are being more cautious when it comes to starting nonjudicial foreclosures in California.
Foreclosure rates tend to drop off when new laws go into effect since lenders and servicers often delay starting the process until they are confident they have appropriate procedures in place to be in compliance with the latest requirements. Once lenders and servicers adjust to the new law, the foreclosure numbers will very likely rise.
More Judicial Foreclosures Are Possible
The question is, once the number of foreclosures being initiated starts to creep back up in California, will the foreclosures be nonjudicial or judicial? (To learn about the difference between judicial and nonjudicial foreclosure, see our Judicial v. Nonjudicial Foreclosure topic area.)
California is considered a nonjudicial foreclosure state. However, some experts have surmised that the increased litigation risks and the extended foreclosure timelines resulting from the Homeowner Bill of Rights will drive more banks to use a judicial foreclosure process since the new law does not apply to court-supervised foreclosures.
Suddenly, banks are starting to look at judicial foreclosures as a cost-effective and time-efficient alternative in California. Could California turn from a nonjudicial foreclosure state into a judicial one? It has happened before in other states. For example, in Oregon and Hawaii (historically nonjudicial foreclosure states), new laws that were implemented to help homeowners ended up pushing most lenders to begin filing judicial foreclosures so they could sidestep the additional requirements.
As a result of the Homeowner Bill of Rights, California too may abandon nonjudicial foreclosures in favor of judicial foreclosures. However, how this plays out is yet to be seen.
To Learn More About the California Homeowner Bill of Rights
For more information about the California Homeowner Bill of Rights, go to the State of California Department of Justice’s webpage at www.oag.ca.gov and click on the link to “CA Homeowner Bill of Rights”.