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California laws protected against foreclosure

California homeowners have oftentimes faced the frightening risk of civil litigation that could take their homes, especially during the mortgage crisis 10 years ago. However, California law provided essential protections against mortgage foreclosure that were unavailable elsewhere.

The first law, Senate Bill 1137, was passed in July of 2008 and remained in effect through 2012. Lenders had to make greater efforts to alert distressed homeowners of pending foreclosure. Good-faith and personal notification had to be made through a phone call or email. Earlier, lenders only sent a letter notifying borrowers of their intent to foreclose.

Borrowers had the right to discuss ways to modify mortgages. Fines of up to $1,000 per day could also be imposed upon lenders who did not properly maintain the property. This law slowed down foreclosures. According to estimates, it prevented 10,000 foreclosures in the first three months it was in effect.

The second law was passed in February of 2009 and provided other relief. Lenders had to wait six months before sending a notice of default to disclosure if they did not offer loan modifications options to homeowners. This doubled the three-month wait that was standard in the state before the mortgage crisis.

These laws persuaded lenders to consider more mortgage modifications. The modification rate in the state grew by 27 percent after the laws took effect. Also, these modifications helped preserve the solvency of banks by lowering take-back property seizures when property values were dropping.

California's mortgage problems also dropped below the national rate. These protections reduced foreclosures in the state by 16 percent and prevented 124,000 foreclosures. This preserved $310 million in housing wealth across the state.

California laws were unique by providing more relief than federal laws. The federal government only provided an opportunity for distressed homeowners to apply for relief without inducing lenders to agree to modifications with homeowners.

Source: The Sacramento Bee, "How two smart California laws kept the 2008 mortgage crisis from being far worse," Stuart A. Gabriel and Chandler Lutz, March 13, 2018

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