California Foreclosure Prevention Act - Helps Short Sales

The California Foreclosure Prevention Act, or Assembly Bill X2 7, which Governor Arnold Schwarzenegger signed in February, is meant to push banks and loan servicers into lowering mortgage payments of homeowners in financial trouble.

It may also motivate banks and loan servicers to negotiate short sales because of the pushing back of foreclosure. This is because some borrowers simply cannot afford the cost of the house they are in (even with a loan modification that would bring the lender’s recovery in line with what it would recover through foreclosure) or are so under water that they are not willing to make the payments even on a modified mortgage.

Even though Mathew Padilla from the OC Register says:

And the bill says it does not require a servicer to violate contracts for “investor-owned loans.” The most troubled loans are generally those investment banks packaged and sold, and if the servicing contract says foreclosure is preferable to a loan modification, nothing in the law stops foreclosure.

The law also says it does not require a bank to “provide a modification to a borrower who is not willing or able to pay under the modification.” I am not sure what “able to pay” means if the target debt-to-income ratio is 38 percent? Maybe if borrowers have to make other hefty payments — on cars, credit cards etc. — then they are out of luck.

We are seeing better response for Short Selling from lenders than in the past.