The California Association of Realtors is trying to drum up support for a bill in the state legislature that would ban deficiency judgments on refinancings.
Most states place some limit on lenders' ability to go after borrowers if the sale of a home does not satisfy the entire mortgage balance. In California, for example, the lender cannot pursue a deficiency judgment if the loan was taken out to buy the home.
But the Golden State does not currently extend that protection to refis. And most defaulted borrowers "have no idea they are personally liable" for the full value of the mortgage even after the bank has repossessed their property, Steve Goddard, the real estate agent group's president, said in a press release issued Tuesday.
Of course, the trade group may have ulterior motives for backing the bill sponsored by Sen. Ellen Corbett, a Democrat from San Leandro.
After all, the prospect of a deficiency judgment hanging over their heads might deter homeowners from giving up their homes through a short sale or strategic default. And right now, distressed sales make up a sizable chunk of the market.
Foreclosure sales alone accounted for 36.4% of California home resales in April (though this figure was down from an all-time high of 56.7% in February 2009), according to MDA Dataquick. (The trade group did not return a call seeking comment by press time.)
Deficiency judgments in residential foreclosures are rare. Most foreclosures in California occur under a deed of trust (not a judicial foreclosure), in which there is no liability for a deficiency, lawyers said. But if that were to change and lenders became more aggressive about collecting leftover debts, deficiency judgments could pose a threat to agents' commissions as well as borrowers' peace of mind.
Still No Peak
The percentage of homeowners who were late on their mortgage payments picked back up during the first three months of the year, after falling in the fourth quarter, the latest evidence that the foreclosure crisis has yet to peak.
The Mortgage Bankers Association said Wednesday that delinquencies increased to a seasonally adjusted rate of 10.06% of all loans outstanding at the end of the first quarter, up 59 basis points from the fourth quarter and 94 basis points from a year earlier. The delinquency rate includes loans that are at least one payment past due, but not in the process of foreclosure.
Delinquencies increased in all categories (subprime, prime and Department of Veterans Affairs mortgages), except for Federal Housing Administration loans.
The percentage of loans in the foreclosure process at the end of the first quarter hit a record, rising to 4.63%, up five basis points from the fourth quarter and 78 basis points from a year earlier.
Meanwhile, the percentage of loans on which foreclosure actions were started during the quarter stood at 1.23%, up 3 basis points from the fourth quarter, but down 14 basis points from the first quarter of 2009.
The latest statistics temper some of the optimism that followed the trade group's fourth-quarter report, in which total delinquencies dropped 17 basis points — the first decline since the first quarter of 2007. Typically, delinquencies spike at the end of the year, and fall at the beginning.
Jay Brinkmann, the MBA's chief economist and senior vice president of research and economics, said one reason the delinquency rate rose in the first quarter is likely more job losses.
"The percent of loans behind one payment had been declining as first-time claims for unemployment began falling in March 2009," he said. "Those new claims stopped falling during the first quarter of this year, which likely halted the decline in the underlying 30-day delinquency rate."
During a conference call with reporters, Brinkmann stood by earlier forecasts that delinquencies should peak sometime in 2010.
"We have been saying we expected this would be the year when delinquencies could top out and start coming down," Brinkmann said.
"We still see a case for gradual improvement. … We may again see some quarterly fluctuations. But ultimately, as that body of loans begins to work its way down, we'll see a reduction in foreclosure starts."
Brinkmann also said the first-quarter numbers should be viewed with caution. "The issue this quarter is that the seasonally adjusted delinquency rates went up while the unadjusted rates went down," he said in a press release.
Chris Gamaitoni, an analyst at Compass Point Research and Trading LLC, said the fact that delinquencies fell on a non-seasonally-adjusted basis is somewhat encouraging, but he isn't fully convinced the market is recovering.
"I am less confident that we are seeing a turn in the mortgage market, given there are a lot of mortgage-specific problems that need to be addressed. All of those aren't going to be taken care of just by an improvement in the economy," he said. "I will not be comfortable until I see what happens in the second and third quarters."
Protests Heat Up
With foreclosures still at record levels, it should be no surprise that the voice of housing advocates continues to grow louder.
May has been a particularly active month, with several grassroots organizations across the country staging "live-ins" by moving families into foreclosed or vacant properties.
It's all part of the "Month of Action," a campaign launched by the Take Back the Land Movement, a national network of housing advocacy organizations, and the Poor People's Economic Human Rights Campaign, to elevate the plight of distressed homeowners.
Actions this month have been planned in at least 20 cities, according to the Poor People's Economic Human Rights Campaign, including Detroit, Chicago, Philadelphia and New York. At least one "live-in," in Madison, Wis., has been met with some resistance from local law enforcement agencies.
After Take Back the Land-Madison and Operation Welcome Home, two local organizations, helped move Desiree Wilson, a mother of two, into a vacant property, police threatened to charge her with trespassing and she moved out after a couple weeks. "We knew that there would be some sort of resistance," said Monica Adams, one of the organizers.
"I'm optimistic that we can get MBSs off our balance sheet by 2020 at the very latest."
Narayana R. Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, in a speech last week.