Should Foreclosures Be Illegal?

I read an interesting article this week about a proposed amendment to the California Constitution that would outlaw foreclosures.

The Foreclosure Modification Act is three pages (and written in plain English; you won't need an attorney by your side to interpret if you click on the link) — basically saying that currently there is no simple way to obtain a loan modification, and that lenders haven’t considered the great reduction in value on these properties.

The act would require lenders to provide principal and interest-rate reductions to help people keep their homes. It will be interesting to follow the legal steps the act will go through next: it has been cleared by the Secretary of State and needs 807,615 voter signatures to appear on the ballot.

The citizen who put forth the proposal, David Benson, makes some very good points. I was shocked the first time I heard of someone who never was late on a payment but when he asked the bank for a loan modification was told that officials couldn’t discuss that option until he was behind on payments.

That’s a crazy Catch 22: The homeowner with great credit basically is told to ruin his credit to discuss the possibility of a loan modification.

I follow the foreclosure market very carefully. I have a subscription to foreclosureradar.com and watch the properties go through the cycle. I’m amazed to see some homes foreclose in the quickest possible time: ninety days after the notice of default is filed plus 20 days after the notice of sale. Other homes stay on foreclosure radar for (literally) years, postponed one month at a time.

The areas hardest hit with foreclosures are those towns that had a lot of new construction during the boom: towns like Antioch and Discovery Bay. Alamo and Danville have very little new construction, fewer foreclosures and less negative impact on the market and prices.

But there are foreclosures everywhere, and it’s interesting to examine the statistics in Alamo and Danville since it does seem as though there are few homes becoming bank-owned and more lenders working with short sales:

• In Alamo, 23 bank-owned homes were sold in 2010: Twelve were priced under $1 million, the rest ranged from $1.1 million to $2.4 million. It's August, but the number of bank-owned sales is only eight.
• In Blackhawk, 19 bank-owned homes sold in 2010, but only six this year.
• In Danville, 63 bank-owned homes sold in 2010, and 65 more have sold this year. Of the 128 sales, 54 were priced under $500,000 and only eight were more than $1 million.

Benson's ideas make a lot of sense and I’m curious to see how they will be received. I’m not sure I agree with outlawing foreclosures, but I do think banks need to be able to deal with each case individually — and perhaps find that in most cases a loan modification would be in everyone’s best interest. It may be cheaper for the bank, nicer for the homeowners and helpful for the recovery of the real-estate market.