According to the LA Times, Many mortgage lenders are “overwhelmed and disorganized but they continue to foreclose on borrowers who are actually in the process of finalizing a home loan modification that would ensure more affordable monthly payments. At a time when the housing market is flooded with foreclosed homes, this doesn’t help anyone. The federal government rolled their attempt to stem the foreclosure crisis with the Home Affordable Modification Program that was created to stop lenders from foreclosing while a modification is pending, but other initiatives don’t.  

California Senators Mark Leno and Darrell Steinberg are proposing to extend the same protection to all Californians seeking loan modifications. The California loan modification bill (SB 1275) would stop a home loan lender or mortgage service company from initiating the foreclosure process until after a mortgage loan modification application was denied. It’s a modest change that wouldn’t require mortgage lenders to change the terms of any loan modification program. Nor would it require lenders to do more to reach borrowers before foreclosing than state law already requires or to slow down foreclosures on borrowers who are beyond help.  The law would require mortgage lenders to notify borrowers who get behind on their home loan payments about the foreclosure process and the availability of home refinancing or loan modification options, if any. And if borrowers applied unsuccessfully for a loan workout, the mortgage company would have to send them a letter explaining why they were denied and how they can appeal the decision before filing a notice that the mortgage was in default.  The purpose of the bill was not just another attempt to help homeowners avoid making their mortgage payments; but it was created to help protect lenders from themselves.  A recent report revealed that Housing counselors say the No. 1 problem is poor communication between mortgage companies and distressed borrowers.

Sales of existing single-family homes were down 30% last year from the 2005 level, while new-home sales showed a record-breaking plunge of more than 60% from 2005 to 2008, according to the Harvard report.

Many Wall Street analysts covering the home-builder sector remain skeptical of talk of a sustained recovery. “Overall, the California builders and construction companies we met with echoed what we have been hearing throughout the U.S.: that there was clear momentum in sales in the spring, but concerns still remain around the sustainability of the improvement we have seen,” said Barclays Capital analyst Megan McGrath in a note recapping a recent industry conference.   “The availability of credit, to both builders themselves and to home buyers, continues to be challenging,” McGrath wrote. “While it appears that banks and mortgage lenders are willing to do some construction-only loans to builders, land-related financing appears to be relatively non-existent.”

According to the Mortgage Bankers Association, at least 3.2 million homeowners entered foreclosure in 2007 and 2008, and an additional 600,000 entered foreclosure in the first quarter of 2009.   Mortgage servicing companies and lenders continue to report a flux of loan modification applications, so we know the demand for foreclosure prevention measures still exists.  Despite these dismal foreclosure figures, the Harvard report did see some long-term positives for the U.S. residential market. In particular, it cited demographic trends such as expected demand from immigrants and so-called echo boomers, or the children of baby boomers. 

According to real estate valuation company Zillow.com, during the fourth quarter of 2008, nearly 20% of homeowners in the San Jose metro are upside down with “negative equity.” Property values range significantly in Northern California neighborhoods. In Gilroy, for example, the median home value dropped 38%. Los Altos declined only 5.4%. But, in Palo Alto, the only city to post an increase, median home values jumped about 5%. This one of the major reasons that California loan modification plans have become so popular with local residents.

Overall the value of homes in the San Jose metropolitan area fell just over 17% in the final three months of 2008, compared with the same period in 2007. This is the steepest drop in more than a decade. Because of the economic downturn the effects of growing insecurity really started to show during the last October-to-December period.

When people are worried about losing their jobs and their stock market investments crumbling, fewer will buy homes despite low mortgage rates and falling prices.  It is a tough time for homeowners with these drops in values, but they will eventually rise again.  In the meantime, this is a great opportunity for first-time homebuyers previously priced out of the market. Low mortgage interest rates along with lower home prices, especially foreclosure properties, are encouraging more buyers.