Legislative Trends Continue in New Year

Global recession, widespread domestic unemployment and limited access to refinance lending are a few factors that led to continued record foreclosure numbers in 2009 here in the United States.

While the percentage of residential mortgage loans in default remains a relatively small number when compared to the total number of loans, this percentage is higher than it has been in any year since the Great Depression.

Realty Trac, publisher of the country's largest database of foreclosure activity, estimates that these numbers will continue to increase through the third quarter of 2010 due to high levels of unemployment and the scheduled upward reset of interest rates on large groups of option ARM loans in the second and third quarters of 2010. This environment has prompted unprecedented legislative activity in the individual states and at the federal level targeting the default servicing and foreclosure industries.

Among 2009's foreclosure legislation was California's SB/ABX27, which required lenders to wait an additional 90-day period on top of the original three-month period between the recording of the notice of default and the issuance of the notice of sale.

The bill was intended to encourage lenders and servicers to enhance consideration of defaulting borrowers for alternatives to foreclosure during this period and to prompt the establishment of serious loss mitigation procedures by lenders and servicers with delinquent loans in California.

Washington's governor signed Senate Bill 5810, enacting mandatory loss mitigation evaluation of borrowers. The bill requires that for qualifying loans, a trustee, beneficiary, or authorized agent wait 30 days after contacting the borrower (or completing required due diligence to contact) to evaluate loss mitigation alternatives before issuing a notice of default to commence foreclosure proceedings.

In September of 2009, Oregon signed Senate Bill 628 which requires that the preforeclosure danger notice established by HB 3630 include additional language regarding the process for requesting a loan modification from the lender, giving borrowers the opportunity to request a modification before the foreclosure sale can be conducted.

The bill requires recording of an affidavit from the beneficiary stating compliance with the loan modification request processes specified in the bill, before any foreclosure sale can be conducted. Additionally, Hawaii and Nevada established mediation pilot programs.

Finally, on Sept. 30, 2009, federal legislators introduced the Preserving Homes and Communities Act of 2009 (SB 1731), based on the assertion that lenders and servicers are not doing enough to avoid foreclosures through the previously enacted Making Home Affordable Program.

The bill provides that no federally related mortgage can proceed to foreclosure unless loan modification qualification of the borrower has been determined and the lender has produced proof of standing to enforce the loan documents. In addition, the bill tasks HUD with establishing a grant program encouraging states to apply for assistance in creating their own foreclosure mediation programs, and appears to make court-supervised mediation a requirement before any federally-related loan can be foreclosed.

However, the federal share of the cost of this required mediation is limited to 50%, leaving states responsible for the remainder. Moreover, the bill does not address how the existing foreclosure mediation programs of states will be affected by the proposed federal guidelines for foreclosure mediation programs.

There are many other issues with this proposed legislation of concern to mortgage servicers, including onerous new reporting requirements. It remains to be seen how quickly the bill will move, and whether a final version will pass as a standalone bill or as part of another legislative package.

It is clear from the legislative trends of 2009 continuing into 2010 that the default servicing and foreclosure industries will become increasingly important to residential lending institutions. As such, many outsourcing firms are placing an increased focus on assisting servicers with the incredible volume of loss mitigation processing required by the current economic and legislative conditions. Michelle Mierzwa is corporate counsel for Cal-Western Reconveyance Corp., a Prommis Solutions company.