Impact of the California Homeowner Bill of Rights on Foreclosures

By Esther Cho, DSNews.com

The California Homeowner Bill of Rights (HBR) is the main driving force behind the recent slowdown in foreclosure sales and short sales in the Golden State, according to a research report from Barclays. In addition to stalling the foreclosure process, provisions in the new bill, which took effect January 1, 2013, have also led to an increase in litigation risk for servicers, analyst at Barclays found.

According the report, short sale activity and foreclosure sales have been dwindling over the past few months, as indicated by foreclosure-to-REO and foreclosure-to-liquidation roll rates. At the same time, roll rates in other states appear to be steady.

As a result of the HBR, Barclays believes “servicers have become significantly more cautious when carrying out foreclosure sales” in the state. While the bill offers several protections to homeowners, one particular provision that allows borrowers to sue servicers for “material violations” of HBR could result in additional costs for servicers.

Violations of the HBR include dual-tracking, failing to provide a single point-of-contact, and neglecting to deliver proper notice of loss mitigation options.

The report explained that prior to a foreclosure sale, homeowners can seek injunctive relief to halt the foreclosure process. If a homeowner secures an injunction, the borrower can pass all legal costs to the servicer through the HBR, even if no material violation of the HBR is proven later, the report explained.

“Our understanding is that securing an injunction may require only a declaration from the borrower that a material violation of the HBR has occurred and some reasonable justification for further investigation into the alleged breach. It is possible that multiple consumer rights attorneys will offer their services on a contingent basis to borrowers facing foreclosure, effectively providing the homeowner with a zero-cost option to pursue litigation,” the report stated.

If the request for an injunction is granted, legal costs could easily rise to the thousands as the court looks into the allegations. The process could also add another 6-12 months to the foreclosure process, according to the report.

“Furthermore, borrowers are much more incentivized to demand a copy of the promissory note, the chain of mortgage assignments, and the borrower’s payment history to collect evidence that a breach of HBR occurred, further stalling the foreclosure process,” the report explained.

Even though California is not a judicial state, analysts suspect the increase in litigation risks and the extended foreclosure timelines might cause servicers to pursue more judicial foreclosures, which are exempt from the HBR’s provisions.