California Foreclosures Spike. Can You Guess In Which Direction?

     The end of the 2012 calendar year is now in sights.  Analysts and real estateprofessionals can’t help but eye the future and speculate on what 2013 might bring.  Many believe 2013 will be a continuation story of much of 2012 –

• supply shortages amidst a demand-heavy market will help drive up median home values
• cash investors will continue to gain an even bigger market presence by snatching up bargain deals afforded by pre-foreclosure and REO sales
• rental market demand will continue its upward climb, as tight lending practices are expected to remain constant and homeowner consumer confidence remains below traditional norms

     But with six weeks still to go in 2012, much can happen in a real estate market as fragile as it currently is, on both national and state levels.  The California real estate markets seem especially susceptible to statistical changes due to the political reforms enacted in our state legislature.  The California Homeowner Bill of Rights, for example, was passed earlier in the year, and is due to take effect January 1, 2013.  The impact of this government intervention is, however, already seeming to rear its head.

     ForeclosureRadar recently reported a 60 percent jump in foreclosure cancellations in California from September to October, the biggest spike since it began tracking cancellations in 2006.   “While this is not the first time cancellations have spiked, this is the largest one-month increase since we started tracking foreclosures in September 2006,” the company says in its report.  Many are attributing this trend to the Homeowner Bill of Rights; more specifically, the provision which restricts the loss mitigation practice of dual-tracking.

     Dual-tracking is a practice wherein a Mortgage Lender / Mortgage Servicer is simultaneously processing a loan through the foreclosure process while said loan is being considered for a home loan modification or short sale workout option.  According to the California Homeowner Bills of Rights legislation, Mortgage servicers will be required to render a decision on a loan modification or short sale application before advancing the foreclosure process.  Said differently, the foreclosure process must be paused until the review of a homeowner’s loss mitigation workout application is completed.  This provision will help many avoid foreclosure, as it will extend a homeowner additional time to seek resolution should any given workout attempt go unsuccessful.  However, analysts are contending these political reforms may have unintended side effects which may hinder market recovery. 

     A recent quote from founder and CEO of ForeclosureRadar, Sean O’Toole, says it all. “The California Homeowner Bill of Rights that takes effect in January 2013 is beginning to impact foreclosure trends.  This is another example of where changes in foreclosure trends are driven by government intervention, and not necessarily economic recovery. While the impacts are still unclear, the elimination of dual tracking may avoid some unnecessary foreclosures, but will lengthen the foreclosure process and delay ultimate recovery. Expect further impacts to foreclosure trends in the months ahead.”