Why would the California Association of Realtors® (CAR) oppose a package of state legislative proposals that are designed to reform the foreclosure process? As we shall see, a good deal depends on what you think counts as reform.
This past week Realtors® from around California meet in the capital city of Sacramento for CAR's annual "Legislative Day." After a morning address by Governor Brown, members received a thorough briefing from CAR's team of legislative advocates (lobbyists). Then the Realtors® headed over to the capitol building where they would go - often in groups of a dozen or more - to their respective senator's and assembly member's offices to talk with them about CAR's legislative issues. With more than a thousand Realtors® moving purposefully through the halls of the Capitol, they constituted a formidable presence.
In other years a typical Legislative Day agenda would call for the Realtors® to be advocating on a variety of issues. They might be supporting or opposing bills on matters ranging from landlord-tenant law and homeowner associations to disclosure requirements and mortgage issues.
This year, though, the effort was much more single-focused. It was concentrated on a legislative package brought forward by California's Attorney General (AG), Kamala Harris. Ms. Harris has sought both to codify and build upon concessions won in a recent settlement between the major banks and 49 of the states. The states had sued over a variety of alleged mortgage and foreclosure abuses.
While CAR has applauded that settlement in general, it opposes the efforts of the AG to expand the settlement's terms into general law. A prepared statement that Realtors® left in their legislators' offices said, "C.A.R. opposes these measures because they will further delay the housing recovery by: creating a disincentive for lenders to lend money; increasing the cost of loans; and allowing strategic defaulters and investors to abuse the foreclosure process."
Some of the measures were aimed at the practice that has become known as "robosigning" where lender employees were processing, and signing, literally hundreds of documents a day - vastly more than could actually have been examined and verified. The legislative proposal, however, has the strong potential for causing more harm than good. First, it would define as a "robosigned" foreclosure document one that included any errors. There would be a fine up to $10,000 for recording such an erroneous document. Moreover, a loan servicer who recorded a Notice of Default would be required to personally certify the chain of ownership of the mortgage. In most cases, this would simply be impossible.
Another part of the proposals seeks to lock into California law the current Federal requirement that a tenant in a foreclosed property must be given at least a 90 day notice for eviction. But, where current law has a requirement that the tenancy be bona fide, that safeguard is removed in the California proposal. This creates endless opportunities for gaming the system.
Similar legislation was recently adopted in Nevada. It has practically shut down the foreclosure "pipeline" there. While some might cheer that result, it doesn't take a wealth of foresight to realize that there is a serious downside to throwing a monkey wrench into the system. It just creates a whole series of new problems.
While no one may be happy about all the foreclosures that have taken place, CAR recognizes that it is a legitimate process that over the years has been pretty carefully refined. Draconian measures such as those proposed would clearly keep properties off the market that are legitimately in foreclosure. Moreover, by virtually removing the threat of foreclosure, the proposals would erode the incentive for short sales as well. All of that just prolongs the problems.