California's Latest Misguided Attempt to Solve the Housing Crisis
The Golden State's bizarre new mortgage "solutions" won't fix the the problem.
Just as the housing industry is showing signs of recovery, California's Democratic officials have passed a "solution" that adds additional regulations and higher costs to the foreclosure process. These are the same officials who can't produce an honest budget and refuse to deal with a deepening public-employee pension crisis and other issues under their purview, but once again they think they can correct problems in complex private markets.
The newspaper photograph from Tuesday showed legislators and the state attorney general congratulating themselves for their work on a Homeowners Bill of Rights, which they believe will be emulated in other states. It is based on a national legal settlement between states and five banks and is likely to be signed into law by Gov. Jerry Brown.
Most news coverage makes the legislation sound benign. The bills would stop lenders from engaging in "dual tracking" whereby they engage in loan modification and begin the foreclosure process. It also would require banks to assign one group of employees to deal with each person's mortgage situation and ban those robo-signed documents. I've dealt with banks in buying and selling houses and they are almost as bureaucratic and uncaring as government officials, so I understand those complaints.
But the California Chamber of Commerce bill summaries gets to the heart of the problem: "Creates procedural traps to impede the foreclosure process and delay lenders' ability to recover collateral legitimately in foreclosure, and creates a private right of action that could discourage investment in California's housing market and make capital more expensive for consumers."
A recent study from Beacon Economics finds that various proposed mortgage reforms will delay the foreclosure process and thereby increase the costs of this process. That will only make it harder for these properties to work their way out of the system, increase lending costs, and tie everything up in litigation and red tape. The real key to reform is letting the market sort itself out, not creating a vast expansion of damages that attorneys representing homeowners can seek.
In its editorial, the Sacramento Bee supported the bills, but noted: "But once the measures take effect, legislators need to monitor them to ensure their actions don't have unintended impacts on the housing market, as banks, real estate agents and the California Chamber of Commerce have warned." Can anyone who covers the Capitol seriously believe such monitoring will happen or that the same people who created these bad bills will know what to do to fix them once things go awry?
Everyone at the Capitol ought to read this part of the Beacon report: "All indications show that the number of distressed mortgages in California has fallen dramatically from its high of three years ago, even as the overall market has begun to find its footing. Sales are trending up and prices have started to move off their 2011 bottom." That conclusion conforms to what I've been reading and seeing, as short sales have helped work distressed properties out of the system.
In stronger coastal markets, there's heated competition to buy foreclosed properties. Even in some hard-pressed inland housing markets, prices are going up slightly. These are important signs of life in the market. What will happen when more lawyers get involved and more regulators require an even taller stack of documents for each transaction?
Even the Sacramento crowd has been one-upped for heavy-handed governmental ideas by officials in San Bernardino County and in the cities of Fontana and Ontario. There, officials created a new government entity, called a joint-powers authority, that will be empowered to seize thousands of underwater mortgages. It's a convoluted scheme—concocted by an influential group of San Francisco investors called Mortgage Resolution Partners—that is brilliant in a sinister way.
Let's say you owe $400,000 on your home and it is now worth $200,000. The government will use eminent domain not to take your home by force but to take the note by force from your lender. With eminent domain, the government pays "fair market value" for the property, but experts say the note holders would be paid a wholesale value of about 20 percent less than the value of the property. In this hypothetical case, your bank would be paid $160,000.
The process would be funded by the new investors. You, the homeowner, would now be paying on that lower $160,000 figure, which would make your payments go down. The government believes it will be fixing the foreclosure crisis by eliminating your negative equity and encouraging you to stay in your home. And the firm that finances this (either MRP, or another company like it) will get properties on the cheap and will restructure the new loans on them, thus creating a fortune for investors.
It's a "win-win," according to supporters, except that it comes out of the hide of the current note holders, who would lose their property—or at least lose the chance to collect money that is owed them. I can come up with a similar "win-win" scheme whereby I steal your money and spend it on a new car. Don't complain. It's a "win-win" for me, the car dealer and even the DMV.
For those who shrug this off because of dislike of banks: The plan leaves out all Fannie Mae and Freddie Mac mortgages and those from major banks to avoid political kick-back, so it only targets privately held mortgages.
This is a troubling abuse of government power to advance the interests of private parties. Likewise, the only beneficiaries from the Homeowners Bill of Rights will be private attorneys who gain a new target. These laws aren't about fixing the mortgage crisis. They are about special interests using government to help them get their piece of the action before the crisis goes away.
Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.
