Foreclosures down sharply after change in notification law

(The Orange County Register) Banks have dramatically scaled backed their foreclosure filings against Orange County homeowners. But will it last?

The big drop in filings started in September. That month lenders filed 871 notices of default in the county, down 65 percent from August and the lowest in 17 months, according to MDA DataQuick. Banks typically file an NOD, which initiates the foreclosure process, after a borrower has missed three or more monthly payments.

Experts say much of that drop was because of a state law that since Sept. 8 requires lenders talk to delinquent borrowers – or demonstrate they have attempted to do so – at least 30 days before filing an NOD and discuss options to avoid foreclosure. The law impacts loans made at the tail end of the housing boom.

However, sources disagree about the long-term impact of the law and on whether actual foreclosures are in decline. Banks seized 1,194 houses and condos in September, down 17 percent from the August peak, but up 169 percent from a year earlier.

For the five months ending in September, banks foreclosed on more than 1,000 homes each month. That compares to a peak of 674 foreclosures in October 1996, as the housing slump of the 1990s came to an end.

Mark Schniepp, an economist and director of the California Economic Forecast, said notices of default appear to have peaked in April, five months before the state law's foreclosure provision was enacted. He said such filings were already trending down because delinquencies on subprime loans peaked earlier this year.

And stronger housing sales in Orange County in recent months are also contributing to a decline in NODs, said Schniepp, who discussed the trend during the recent UCLA Anderson Forecast for Orange County and in a follow-up interview with the Register. Such filings are strongly influenced by housing sales, he said.

"Housing led us into this downturn, and housing is expected to lead us out," he said.

Foreclosures in Orange County will peak by the end of this year, if they haven't already, Schniepp said. It usually takes about seven months after a peak in NODs for foreclosures to hit a similar wall, he said. By that math, November could be the beginning of the end for foreclosures.

Schniepp originally expected foreclosures to peak in the third quarter at around 4,000, but this quarter could top that. However, foreclosures should decline next year, he said.

Still, he has mixed feelings about the state law, known as SB 1137, requiring communication between borrowers and lenders. The law might do some good by giving borrowers more time, but it also distorts the housing correction, he said.

"It's not allowing the free market to clear all this junk out as quickly as possible," he said. "We are prolonging the inevitable."

Several consumer groups strongly supported the bill. They liked both the communication required and the bill's doubling to 60 days the eviction notice required to tenants renting a foreclosed property.

Paul Leonard, director in the Oakland office of the Center for Responsible Lending, said it is encouraging that lenders and loan servicers appear to be complying with the law.

But he said Gov. Schwarzenegger hasn't said much publically about the law since signing it.

"I don't think they have any measures in place to measure its success, to get a handle on how many meetings are happening as result of (the law)," Leonard said.

Leonard said without strong follow-up from state officials, the law may have little impact on actual foreclosures. It may only delay foreclosures, he said.

Still, the immediate impact of the bill is striking, said Sean O'Toole, president of ForeclosureRadar.com.

Before the bill became law on Sept. 8, banks typically filed 100 to 150 notices of default each day in the county, O'Toole said. For example, on the Friday before the law was enacted banks filed 162 NODs, and the following Monday, the first day of the new regulation, banks filed just 18 NODs. That's an 89 percent drop in filings in one business day.

And NOD filings fell even further, languishing in the single digits in the days that followed, O'Toole said. They have rebounded slightly, but remain low, he said.

O'Toole dismisses much of that decline as a paperwork issue, saying it will take lenders a while to get used to the new law and then notices of default will rebound.

However, there are other pressures on NODs, he said. Before the law was enacted notices of default were flat or down a bit from the April peak not because more people are paying their mortgages but because lenders can't handle all the loans going bad, O'Toole said.

"We hit capacity of what lenders can do," he said.

However, O'Toole suspects lenders have been encouraged by the recent jump in sales. They may be thinking if they hold off on foreclosure they will get a higher price later, O'Toole said.

But that is backward thinking, O'Toole said.

"Demand is going up because prices are going down," O'Toole said.

In other words, lenders won't get more money for their foreclosures by delaying them, he said.

Another factor that could lead to fewer foreclosures is the October settlement between Bank of America, its subsidiary Countrywide Financial, and 11 states over Countrywide's lending practices. Starting Dec. 1, as many as 400,000 customers could get $8.4 billion in interest rate and principal reductions on their mortgages to avoid foreclosure. As much as $3.5 billion could go to California borrowers.