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October 13th, 2011

California says, “No more foreclosures”

by Peter Miller

 

Foreclosure for SaleThere’s a new effort in California with would end the foreclosure crisis as we know it.

The idea is to have a referendum and simply ban foreclosures. And while this is a thought which is surely attractive in many ways, as a practical matter it’s not going to happen.

Under the proposed referendum to create a Foreclosure Modification Act, lenders in California would lose the right to foreclose.

“No citizen of the State of California shall lose or have that deemed as their personal home or property taken by foreclosure or any instrument thereof or similar to,” would be the law of the state if the referendum passes. Interestingly, this is part of the proposal that could actually be successful.

States can stop foreclosures

States plainly have a right to stop foreclosures, at least temporarily.

In the 1934 Blaisdell case, the Supreme Court ruled that Minnesota could suspend foreclosures. Moreover, there are any number of other situations where foreclosures have been stopped by government action.

But, the California proposal goes further.

“In the event of non payment in the time defined by standard loan contracts due to financial hardship or illness by the home or property borrower,” says the proposal, “then the lending institution, loan servicers, mortgagees, trustees and beneficiaries shall make every effort to assist California borrowers and in the event of a reduction of local property values of more then l 0%, a reduction of principal to reflect the new value shall be used, as well as to reschedule payments and or reduce interest rates and or refinance without credit review of the loan in order to bring said loan current.”

California can’t do this

The problem is that the state of California can’t do this. Neither can any other state or even the federal government.

To understand why, turn to the Constitution. Under the Fifth Amendment the government can only take your property in return for “just compensation.”

In other words, a state cannot simply order a lender to reduce debt or lower mortgage rates.

If the California referendum proposal makes it onto the ballot and is then passed it will quickly go to court and a judge will rule that the entire proposal is invalid.

So is that the end of the story?

Not quite.

The referendum proposal reflects a widespread belief that lenders have grossly abused the system. A ton of signatures would signal to state lawmakers that the public wants either action or a new set of elected officials.

So what could be done within an allowable framework?

In many states lenders are allowed to collect “deficiency” judgments when a mortgage is not fully repaid. In effect, the lender can sue the borrower for any unpaid principal after a home is sold with a short sale or foreclosed.

California already prohibits deficiency judgments against borrowers when a prime residence is foreclosed and the property has been financed with a purchase money mortgage–the loan used to buy the house. The deficiency judgment ban ends if the property is refinanced, and it does not apply to investment property.

The state could go further and prohibit deficiency judgments regardless of how the property is financed. It might also end deficiency judgments against investment properties with one-to-four units.

Since deficiency judgments are already banned in part, there’s no reason why the ban could not be extended. That’s not a taking, that’s just a leveling of the playing field.

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4 Responses to “California says, “No more foreclosures””

  1. Scott Says: October 14th, 2011 at 12:38 pm

    Well, wouldn’t that be a brilliant idea! Let’s see, if that were to actually pass, how many lenders do you think would still be willing to lend in California?? ZERO! There’s no doubt that every bank would pull out of CA and with no financing available, what do you think will happen to home values and tax revenue??? Genius!! What a bunch of morons!!

  2. Julie Thompson Says: October 19th, 2011 at 8:53 am

    Stop foreclosure temporarily does not solve the role problem. A lender will not reduce debt or lower mortgage rates just because you want to.
    We have to think of a better way to avoid foreclosure.

  3. Ctdeihl Says: November 16th, 2011 at 5:12 pm

    If Banks would Modify loans instead of Practicing in Theif By Deception Acts or Fraudulent Documentation,maybe there wouldn’t be such a HIGH Forecloser rate.Banks are nothing more then Loan Sharks that will stab you when your back is turned and get Elected Official to hide their wrong doings by Finacial Gains.It’s all a Corrupt Finacial Scam on the Public People and in due time the TRUTH WILL come out.

  4. carol Says: November 17th, 2011 at 7:08 pm

    I wish the state could block foreclosure and make modifications mandatory. My mortgage is underwater, and i attempted a modification. I was denied twice not due to income but the rules. The two rules which prohibited me, I owe more than my house is worth; secondly you can only have two modifications in 5 years.
    To this I say you should only be able to have one economic downturn in ten years. I also would like to say individuals do not have control over everything in their life. My health caused me to be unable to make my payments on two different occasions. Somethings you can not control but laws should be one. No More Foreclosures in CA.

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