Home defaults slide as California law puts on the brakes

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By William Heisel Marc Lifsher Maura Reynolds

Reporting from Sacramento and Washington -- The number of people losing their homes in California hit a record high of nearly 80,000 in the last three months, but a new state law appears to be dramatically slowing the foreclosure process -- at least for now.

Loan default notices, the first step toward foreclosure, fell to 94,240 for the three months that ended Sept. 30. That's down sharply from the record 121,673 for the previous quarter, according to research firm MDA DataQuick.

The big drop came in September, when a new state law took effect that blocks lenders from initiating foreclosure proceedings until 30 days after contacting the borrower or making "due diligence" efforts to do so.

Default notices sank to 14,995 in September, after averaging more than 40,000 for each of the five preceding months.

"That new law virtually slammed the brakes on mortgage default filings," said Andrew LePage, a DataQuick analyst. "We don't know yet how many of those loans will get worked out versus just shifted to late this year or early next year."

State Senate President Pro Tem Don Perata (D-Oakland) introduced the bill after hearing numerous complaints from homeowners who said they had been unable to make contact with their lenders, or the firms servicing their loans, to avert foreclosure.

"Once all this stuff exploded and you realized how these mortgages were sold, packaged and resold, it was no wonder that the homeowner was confused," he said. "There wasn't anybody to talk to about their condition."

Consumer advocates said they hoped the Perata bill would be more than a temporary brake on foreclosures.

"Hopefully, the additional time will allow more win-win resolutions, where servicers and borrowers can figure out a modification that makes sense, is sustainable and provides some return for investors," said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco.

A mortgage lending group said another factor in the decline may be a new willingness on the part of lenders to renegotiate loans for struggling borrowers.

"I think it's a sign of real progress," said Beth Mills, a spokeswoman for the California Bankers Assn. "We really have seen the lines of communication between lenders and borrowers improve, and we're hoping that leads to more people staying in their homes."

There are skeptics, though. They say that the numbers are showing the end of just one wave of foreclosures, mostly from people who took out adjustable-rate mortgages in 2005 and 2006 that later reset at a higher rate that they could not afford.

With the economy slowing down and expectations of rising unemployment, a new wave of foreclosures could hit early next year.

"I'd be the first person to stand up and cheer, but I have to tell you it really is wishful thinking," said Rich Sharga, senior vice president of RealtyTrac, an Irvine housing research company.

RealtyTrac's latest nationwide numbers showed that 265,968 homes were in some state of foreclosure in September, up about 21% from the same month a year earlier.

Sharga noted that other states saw a decline in foreclosure notices after adopting laws similar to California's, only to see a rebound. Massachusetts started requiring a 90-day notification in May. Loan defaults dropped for three months before skyrocketing more than 400% in September, he said.

But the difference now is that banks are feeling significant pressure, from both shareholders and regulators, to squeeze some value out of these bad loans, said Jeff Lazerson, president of online mortgage clearinghouse Mortgage Grader.

Lazerson recently returned from the Mortgage Bankers Assn.'s annual conference in San Francisco -- where protesters rushed a stage full of speakers at one point -- to say that he had noticed a significant change in tone.

"I was as cynical as everyone else about what the lenders were doing, but now they really seem to understand just how ugly this is," Lazerson said. "Now we truly have the whole industry making this push to keep people in their houses."

According to DataQuick, 79,511 homes were lost to foreclosure in California for the three months that ended Sept. 30, a 228% increase over the same period a year earlier and the highest number since the company began tracking foreclosures in 1988.

Chairwoman Sheila Bair of the Federal Deposit Insurance Corp. said the government wasn't doing enough to stem the rising tide.

"We are falling behind," Bair said in testimony before the Senate Banking Committee. "There has been some progress, but it's not been enough, and we need to act."

Bair said that one way to spur the process forward was to standardize protocols for mortgage refinancings, as the FDIC did in the case of IndyMac Bank, the collapsed Pasadena-based lender it took over this summer.

That would cut through some of the complications created by the fact that most mortgages have been packaged and sold as securities, and the investors in those securities may not want workouts to happen.

"Through this week, IndyMac has mailed more than 15,000 loan modification proposals to borrowers. More than 70% have already responded to the initial mailings and . . . more than 3,500 borrowers to date have accepted the offers, and thousands more are being processed," Bair said. "The hope is that our mortgage relief program can be a model and a catalyst to spur loan modifications across the country."

Congress passed a $300-billion foreclosure prevention measure over the summer that took effect Oct. 1, but lawmakers have expressed concern that it may not be enough.

Members of Congress complained that the administration has been far more responsive to Wall Street's needs than to ordinary homeowners. Since the subprime crisis emerged about 18 months ago, President Bush and his top advisors have relied on voluntary, industry-led programs to address the problem.

"In the month of August, over 9,800 homes entered foreclosure every day," said Sen. Robert Menendez (D-N.J.). "If this statistic was that 9,800 Wall Street jobs were being lost every day, we would have ended this a long time ago."

But others say there are signs of progress.

Bank of America Corp., after acquiring mortgage lender Countrywide Financial Corp., recently agreed to an $8.4-billion, 12-state legal settlement that required it to rework loans.

And some banks have simply realized that working out loans may help their balance sheets. Downey Savings & Loan said in its quarterly report Wednesday that it was working aggressively to move people into better loans, modifying $1.4 billion worth of loans since the summer. As a result, the company was able to exceed new capital requirements imposed by federal regulators.

Hope Now, an alliance of lenders, mortgage servicers and credit counselors, is expected to report this month another increase in the number of loan modifications. So far, the group says it has prevented 2.3 million homes from going into foreclosure.

"It's clear that servicers are month over month and quarter over quarter improving the number of loan workouts," said Faith Schwartz, Hope Now's executive director. "If this wasn't happening, you would see far more foreclosed homes in the market."

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