The idea of a "homeowner bill of rights" (often called HBR for short by many in the mortgage community) emerged in the wake of the 2007 and 2008 depths of the financial crisis, designed to give borrowers defaulting on the mortgages some legal rights when facing their foreclosing lenders.
California, which adopted the first such measure nationwide nearly two years ago, is largely seen as a leader in the movement. Nevada, Minnesota, Hawaii and Oregon are following suit and either legislating changes similar to California's HBR, or considering legislation to the same effect.
Back in May 2013, HW Magazine featured a three part series by Robert Jackson, Esq., managing attorney and founder of the Irvine, Calif.-based Law Offices of Robert Jackson and Associates where he provided an in-depth look into what the Californiia HBR is and the potential implications of the state's legislation.
Now, almost a year later, many of the predictions made in that series are proving correct.
Enacting the HBR creates two problems for lenders: it increases litigation exposure for lenders looking to foreclose on a defaulted borrower, and piles on an additional layer of compliance costs. As a result, an increasing number of lenders and servicers have begun eschewing California's largely non-judicial foreclosure process in favor of brining their foreclosures into the courtroom.
"We're seeing servicers increasingly favor the judicial route for foreclosures in California," said Scott Jackson, Esq., president and managing attorney with the Jackson and Associates law firm, which specializes in representing lenders, servicers and investors in foreclosure, bankruptcy and post-foreclosure legal matters.
Typically, the requirements for a non-judicial foreclosure are far less than the more formal judicial process. In a non-judicial foreclosure, there is no court intervention and much of the default process can proceed with a series of mailed and posted notices unless the borrower objects and files a lawsuit challenging the process.
28 U.S. states, predominantly in the Western half of the United States, have provided for non-judicial means of foreclosing a defaulted borrower's interest in a property — California among them. In these states, borrowers give lenders a "power of sale" outside of the judicial process in the event they default on their loan, at the time they agree to their original mortgage.
In contrast, a judicial foreclosure is a formal court proceeding where the lender files a compliant asking the court to allow the lender to foreclose its lien and take possession of the property. States like New York and Florida traditionally utilize the judicial process, which has typically been more costly and lengthy when compared to the non-judicial process.
But this traditional logic is now quickly being turned onto its head.
According to a recent article in Bloomberg, in the first quarter of 2014, banks filed 2,348 court notices in non-judicial states, a drastic jump compared to just seven notices in the first quarter one year prior.
Furthermore, judicial foreclosure timelines are now actually becoming faster than non-judicial timelines, thanks to the complexities now associated with non-judicial foreclosure in states that have enacted HBR-like statutes — which means lenders are quickly gravitating towards the judicial route, both because it's more efficient and because it eliminates risks associated with running afoul of the HBR.
If lenders go the judicial route to foreclosure, they are not subject to fulfill the enormous checklists that come with HBR-related non-judicial foreclosures.
So what is the potential impact of this change, down the road?
Robert Jackson predicted in his earlier HousingWire series that some consumer advocates will likely eventually characterize the switch from non-judicial to judicial foreclosures in states like California as a "loophole" that harms consumers. Armed with his logic, he expected consumer groups to attempt to place the same onus on lenders in the courtroom that current HBR statutes place on the non-judicial forelcosure process.
But the differences in procedure between judicial and non-judicial foreclosures isn't a loophole, he explained. Regulations X and Z still apply to judicial foreclosures, Jackson said — in addition to a judge overseeing the foreclosure process directly.
In early 2013, the Consumer Financial Protection Bureau issued significant changes to both Regulation X — which implements the Real Estate Settlement Procedures Act — and Regulation Z, the Truth in Lending Act. These changes went into effect January 10th of this year and have placed significant new compliance requirements on loan servicers seeking to foreclose.
But all of this regulation clearly comes at a cost. Scott Jackson explained increased liability and compliance problems for servicers will trickle down into how much mortgages cost for consumers. Credit is already tighter than a drum, as a result — and none of this is helping the would-be homebuyer, he said.
“You need balance for both the homebuyer and the lender,” Scott Jackson said.
“Nobody is ultimately interested in trying to take a house if it can be avoided, but you have to have an efficient process. You need a happy medium. Without revision, lenders will have to go the judicial foreclosure route," he argued.
“Non-judicial foreclosures are all anyone [in the mortgage community] knows in states like California: the mindset is 'we have done it this way, so we are going to keep it this way.' But the HBR makes all of the benefits of a non-judicial foreclosure disappear,” he said.
It's taken a year, but it looks like more than a few lenders are starting to catch on.