California Foreclosures: Must Your Lender Accept Your Loan Modification Offer?
By Michael Doan on Sep 8, 2008 in Mortgage Law Network
A new law enacted on July 8, 2008, now requires Lenders of residential loans in the State of California to accept loan modifications in most foreclosure situations. California Civil Code 2923.6 went into effect on July, 2008, and applies to all residential loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences.
Practically all residential mortgages have Pooling and Servicing Agreements ("PSA") since they were transferred to various Mortgage Backed Security Trusts after origination. These vehicles likewise almost always contain a duty to maximize net present value to its investors and related parties. Under the new laws, California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.
Essentially, California Civil Code 2823.6(a) states that "a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1)loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis."
Likewise, California Civil Code 2823.6(b) now provides "that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority."
So what does all this mean? Well, lets take an example:
John Martin's loan is presently in default, or reasonably foreseeable of near default. The house he previously bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted to $375,000. While Mr. Martin can no longer afford the $9,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:
a) New Loan Amount: $330,000.00
b) New Interest Rate: 6% fixed
c) New Loan Length: 30 years
d) New Payment: $1978.52
While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account. Foreclosures typically cost the lender $50,000 per foreclosure. For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors. Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.
Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00. Thus California Civil Code 2823.6 would mandate a loan modification to the new terms.
The homeowner just got a new arrow to add to his foreclosure defense quiver. Pursuant to California Civil Code 2823.6, the lender is now
contractually bound to accept the loan modification as provided above.
Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court.
California Senate Bill 1137, enacted and effective on July 8, 2008 was a variety of new laws that directly addressed California's foreclosure crisis, among the highest in the nation. Civil Code 2823.6 was among the new laws, and clearly establishes a legal standard of conduct for servicers of pooled or securitized mortgages in meeting their legal duties owed to mortgage investors where a proposed loan modification "maximizes net present value." But the law appears to direct that lenders and their agents make loan modification offers to borrowers "if such a modification or plan is consistent with its contractual or other authority" - that is, results in a "maximized net present value" if indeed their servicing contracts so provide.
Does this compel lenders to offer or accept offers for a "maximized net present value" loan modification or does it merely protect servicers if in fact they do so?
9. Would codify a legislative finding that any duty servicers
may have to maximize the net present value under their
pooling and servicing agreements is owed to all parties in a
loan pool, not to any particular parties, and that a
servicer acts in the best interest of all parties if it
agrees to or implements a loan modification or workout plan,
10. Would codify the intent of the Legislature that the
mortgagee, trustee, beneficiary, or authorized agent offer
the borrower a loan modification or workout plan, if such a
modification or plan is consistent with its contractual or
Creative litigation lawyers, and California's appellate courts will determine this soon, predictably.
See how this might work for you.
Present value calculator
Without legal leverage (see above, Reg Z) "loan modifications" may simply be a shell game.
A content rich source on mortgages in crisis: the mortgage lender implode=o=meter
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