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New law stalls foreclosure filings

October 19, 2008|Peter Viles | Times Staff Writer

A new state law requiring lenders to contact homeowners before foreclosure filings led to a dramatic drop in foreclosure activity in California in September, according to the website ForeclosureRadar.com. The effect of the state law is so dramatic, the website says, that it will make monthly foreclosure statistics worthless as barometers of housing market conditions.

ForeclosureRadar reports that the number of notices of default filed in September dropped 61.8% from August levels, and the number of notices of trustee sale filings -- which mark the end of the foreclosure process -- dropped 47.3% in a month.

The website, which had previously predicted that such a slowdown was coming, says the cause stems from California Senate Bill 1137, which requires lenders to make a series of attempts to contact homeowners, and then wait 30 days before filing foreclosure notices. In a news release, Sean O'Toole, founder of ForeclosureRadar, says the new law has made month-to-month foreclosure statistics "useless in understanding market conditions."

More, from O'Toole: "We expect SB 1137 to have no long-term impact beyond delaying the foreclosure process for homeowners, and slowing the overall recovery."

The new California law encourages loan modifications as an alternative to foreclosure, a common goal of various government programs. O'Toole, however, is doubtful that loans can be successfully modified on a broad scale in California:

"Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions or extending the unsustainable teaser rates that created the foreclosure crisis in the first place. Wide-scale adoption of large principal balance reductions also pose significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default and/or foreclosure activity in the future, a consequence clearly not intended."

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