Let’s Make a Deal on Foreclosures in California

Via The Los Angeles Times Editorial Page
May 4, 2011

It’s been five years since the U.S. housing bubble burst, triggering a downward spiral in the credit markets and the eventual default of millions of overextended borrowers. Yet the companies that service most mortgages are still struggling with the volume of loans going bad, in large part because they are woefully understaffed. An extreme example of the problem is when one arm of a mortgage servicing company forecloses on a home even as another arm is offering to modify the loan in order to rescue the borrower. A state Senate committee is considering a bill to block that from happening, and lawmakers should support it.

The stubbornly high unemployment rate and high levels of debt taken on by many borrowers mean that many foreclosures can’t be avoided. But the way lenders have responded to defaults has been problematic too. Federal regulators recently brought enforcement actions against the 14 largest loan servicing companies for significant weaknesses in their foreclosure processes. The problems include documents being signed by company employees who made no effort to verify them — a practice known derisively as robo-signing. Regulators have also pledged to draw up national standards that would require companies to improve staffing, training and recordkeeping.

Such standards are welcome but not sufficient. State Sen. Mark Leno (D-San Francisco) would go one important step further; his bill, SB 729, would bar lenders from pursuing a foreclosure until they’ve finished reviewing the borrower’s application for a loan modification. The measure wouldn’t force lenders to modify loans; instead, it would require them to notify borrowers about modification programs and, if they applied but did not qualify, give them a decision before starting the process of repossessing their home. The Senate Banking Committee balked at the measure last month but is slated to consider it again this week, and lawmakers should approve it.

If a troubled borrower qualifies for a modification that preserves more of the loan’s value than a foreclosure would, it’s in the lender’s interests to see that process through to its conclusion. No one should lose a home because a loan servicing company was too overwhelmed or disorganized to stop itself from foreclosing prematurely.