BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1639
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          Date of Hearing:   April 19, 2010

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
               AB 1639 (Nava, Lieu, Bass) - As Amended:  April 12, 2010
           
          SUBJECT  :   Mediated Mortgage Workout Program

           SUMMARY  :   Establishes a Meditated Mortgage Workout Program  
          (MMWP) for borrowers facing foreclosure whereby a borrower could  
          request to participate in a mediation sessions with their lender  
          to examine mortgage loan modification options or foreclosure  
          alternatives.   Specifically,  this bill  :  

          1)Provides that a mortgagee, trustee, beneficiary, or authorized  
            agent shall inform a borrower via certified mail accompanying  
            a notice of delinquency that the borrower may request to  
            participate in the MMWP.  The notice shall include the  
            telephone number, email address, and Internet Web site for the  
            administrator.

          2)Provides that the provisions of the MMWP apply to primary  
            residences only.

          3)Allows a borrower 30 days from the receipt of the delinquency  
            notice to request participation in the MMWP.

          4)Provides that if a borrower chooses to participate in the  
            program prior to the filing of a notice of default (NOD) then  
            the mortgagee, trustee, beneficiary, or authorized agent is  
            not required to exercise other due diligence contact  
            requirements as currently mandated under the law (See Civil  
            Code 2923.5).

          5)Specifies that when a NOD is filed, a separate notice shall be  
            sent to the borrower informing them of their right to request  
            participation in the MMWP printed in large bold type and  
            printed in English, Spanish, Chinese, Tagalog and Korean.

          6)Provides that if a borrower elects to participate in the MMW  
            Program they must complete an election form either via  
            internet website, email, telephone, or via mail service.

          7)Requires within 10 days of requesting to participate in the  
            MMWP, the borrower shall submit all of the following to the  








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            administrator:

             a)   Tax returns filed for the prior tax year, if the  
               borrower was required to file a tax return for that year;

             b)      Payroll or other income verification for the previous  
               two months; and, 

             c)      If in the case of a borrower requesting to  
               participate after a NOD has been filed, the first deposit  
               of 50 percent of their current monthly mortgage payment as  
               a good faith demonstration of readiness to participate in  
               the program.

          8)Requires that within 10 days of receiving notice that the  
            borrower has elected to participate in the MMWP, the  
            mortgagee, trustee, beneficiary, or authorized agent shall  
            submit all of the following documents to the program  
            administrator:

             a)   The applicable Pooling and Servicing Agreement, if any;

             b)   The loan application, loan origination documents,  
               appraisal, and payment history;

             c)   The original note and assignments or certificate  
               regarding a lost document;

             d)   Documentary evidence of current ownership of chain of  
               custody of the mortgage note; and,

             e)   The net present value formula that the mortgage,  
               trustee, beneficiary or authorized agent uses.

          9)Provides that the foreclosure process is suspended during the  
            time the borrower is participating in the program.

          10)Requires the administrator to notify the mortgagee, trustee,  
            beneficiary or authorized agent within 15 days of the  
            borrower's election to participate in the program.

          11)Provides that the mortgagee, trustee, beneficiary or  
            authorized agent shall deposit an administrative fee of $500  
            and a deposit of mediator's fees of $600, as well as, all  
            required documentation within 10 days of notification from the  








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            administrator of the borrower's request to participate in the  
            program.

          12)Specifies that a failure to deposit the require fees within  
            10 days, the foreclosure proceedings shall be delayed until  
            such time as the fees are paid.

          13)Prohibits continuance of the MMW program session(s) unless  
            certain conditions are met.

          14)The borrower and mortgagee, trustee, beneficiary, or  
            authorized agent may agree on the terms of a loan modification  
            which may include any or all of the following features:

             a)   An interest rate reduction for a fixed term of at least  
               five years;

             b)   An extension of the mortgage term, not to exceed 40  
               years from the original date of the loan;

             c)   Deferral of a portion of the principal amount of the  
               unpaid principal balance until maturity of the loan;

             d)   Reduction of the principal balance;

             e)   Compliance with a federally mandated loan modification  
               program;

             f)   Other alternatives that may reduce the borrower's  
               monthly payment to 31 percent or less of the borrower's  
               debt-to-income ratio and that are designed to meet  
               long-term sustainability for the borrower.

          15)Provides that nothing shall be construed to prevent a  
            creditor from offering or accepting alternatives in writing to  
            foreclosure, such as a short sale or deed-in-lieu of  
            foreclosure, but only if the borrower requests these  
            alternatives, rejects a loan modification offered pursuant to  
            this section, or does not qualify for a loan modification  
            pursuant to this section.

          16)Specifies that if a borrower fails to meaningfully  
            participate in the MMWP, the program shall be suspended,  
            unless the borrower cures noncompliance within 10 days.









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          17)Specifies that the mortgagee, trustee, beneficiary or  
            authorized agent fails to meaningfully participate,  
            foreclosure actions shall be suspended until such time that  
            the mortgagee, trustee, beneficiary or authorized agent cures  
            noncompliance.

          18)Defines "meaningful participation"  as the following:

             a)   Attendance at all mediation sessions; and,

             b)   Presentation of all required documents and payment of  
               all required fees.

          19)Provides that the mortgagee, trustee, beneficiary or  
            authorized agent shall not report negative credit information  
            about the borrower to a credit reporting agency if the  
            borrower successfully completes the MMWP and that during the  
            MMWP the borrower shall not be assessed late fees or other  
            charges.

          20)Requires the administrator to report quarterly to the  
            Legislature regarding the performance of the MMWP, including  
            all of the following information:

             a)   The number of homeowners who attend mediation prior to  
               NOD;

             b)   The number of homeowners who attend mediation after  
               receiving a NOD;

             c)   The number of mediations suspended because of lack of  
               meaningful participation by the borrower;

             d)   The number of mediations suspended because of lack of  
               meaningful participation on the part of the mortgagee,  
               trustee, beneficiary, or authorized agent;

             e)   The number of mediations that result in a loan  
               modification; and,

             f)   The number of mediations that result in a solution other  
               than a loan modification.

          21)Each mortgagee, trustee, beneficiary, or authorized agent  
            participating in the MMWP shall post public data reports on a  








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            quarterly basis on its Internet Web site detailing the  
            following:

             a)   The number of loans that have been modified through the  
               MMWP and the type of modification;

             b)   The final disposition of loans that were in the MMWP but  
               not modified;

             c)   The final disposition of loans that did not go through  
               in the MMWP;

             d)   The type of loans in a portfolio serviced by others,  
               delineated by prime, subprime, and nontraditional;

             e)   The loans in a portfolio or serviced by others that are  
               securitized;

             f)   The number of home retention actions;

             g)   Re-default rates for portfolio loans and loans serviced  
               for others;

             h)   The default rates for portfolio loans and loans serviced  
               for others;

             i)   The default rates of loans modified in 2008 by changes  
               in payment;

             j)   Newly initiated home retention actions compared with  
               foreclosure actions;

             aa)  Completed foreclosures and other home forfeiture  
               actions;

             bb)  The overall portfolio performance by percentage;

             cc)  The performance of government guaranteed loans, by  
               percentage;

             dd)  The performance of government sponsored enterprise  
               loans, by percentage;

             ee)  Seriously delinquent mortgages, by percentage;









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             ff)  HAMP actions by investor and risk category;

             gg)  Changes in loan terms made by modifications during 2009;

             hh)  Changes in monthly principal and interest payments owing  
               to modification, by the number of modifications;    

             ii)  The number of modified loans, 30 or more days  
               delinquent;

             jj)  The number of modified loans, 60 or more days  
               delinquent; and,

             aaa) The number of modified loans, 90 or more days  
               delinquent.

          22)Provides that the administrator shall:

             a)   Implement rules and standards for choosing qualified  
               mediators;

             b)   Implement rules and standards for removal of mediators;

             c)   Develop standards and rules for forms and reports;

             d)   Require additional training for mediators to meet the  
               goals of the MMWP; and,

             e)   Collect all fees as required.

          23)Provides that an Administrator of the MMWP shall be appointed  
            by the Governor and confirmed by the Senate.

          24)Requires that a mediator shall use all reasonable efforts to  
            ensure that each MMWP session is completed within 60 calendar  
            days of the mediator's appointment.

          25)Requires the mediator to issue a report to the Administrator  
            upon completion of the mediation that shall state whether the  
            parties reached a mutually acceptable resolution.

           EXISTING LAW  

          1)Regulates the non-judicial foreclosure process pursuant to the  
            power of sale contained within a mortgage contract, and  








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            provides that in order to commence the process, a trustee,  
            mortgagee, or beneficiary must record a NOD and allow three  
            months to lapse before setting a notice of sale for the  
            property. [Civil Code Section 2924, all further references are  
            to the Civil Code].

          2)Provides that the mortgagee, trustee or other person  
            authorized to make the sale must give notice of sale, and  
            requires notice of the sale to be made, as specified, at least  
            20 days prior to the date of sale. [Section 2924f].

          3)Provides that a mortgage, trustee, beneficiary, or authorized  
            agent may not file a NOD until 30 days after contact has been  
            made with the borrower who is in default. [Section 2923.5a1].

          4)Requires  the mortgagee, trustee, beneficiary or authorized  
            agent to contact a borrower in default in person or by  
            telephone and inform them of their right to a subsequent  
            meeting, and telephone number of the United States Department  
            of Housing and Urban Development (HUD) to find a HUD certified  
            housing counselor.  [Section 2923.5a2].

          5)Allows a borrower to assign a HUD-certified counselor,  
            attorney or other advisor to discuss with the entities options  
            for the borrower to avoid foreclosure. [Section 2923f].

          6)Provides that a NOD may be filed when the mortgagee, trustee,  
            beneficiary or authorized agent has not contacted the borrower  
            provided that the failure to contact the borrower occurred  
            despite reasonable due diligence on the part of the entity and  
            that "due diligence" means and requires the following:

             a)   The mortgagee, trustee, beneficiary or authorized agent  
               sends a first class letter that includes the toll-free  
               number available for the borrower to find a HUD-certified  
               housing counseling agency; and,

             b)   Subsequent to the sending of the letter the mortgagee,  
               trustee, beneficiary or authorized agent attempts to  
               contact the borrower by telephone at least three times at  
               different hours and on different days.  [Section 2923g].

          7)Requires the mortgagee, trustee, beneficiary or authorized  
            agent to maintain a toll-free number for borrowers that will  
            provide access to a live representative during business hours  








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            and requires the mortgagee, trustee, beneficiary or authorized  
            agent to maintain a link on the main page of its Internet Web  
            site containing the following information:

             a)   Options that may be available to borrowers who are  
               unable to afford their mortgage payments and who wish to  
               avoid foreclose, and instructions to borrowers advising  
               them on steps to take to explore these options; and,

             b)   A list of documents borrowers should collect and be  
               prepared to submit when discussing options to avoid  
               foreclosure. [Section 2923g (5)].

          8)Specifies that the notice and contact requirements do not  
            apply in the following circumstances:

             a)   The borrower has surrendered the property as evidenced  
               via a letter or delivery of keys to the property to the  
               mortgagee, trustee, beneficiary or authorized agent ;

             b)   The borrower has contacted a person or organization  
               whose primary business is advising people who have decided  
               to leave their homes on how to extend the foreclosure  
               process and avoid the contractual obligations; or,

             c)   The borrower has filed for bankruptcy. [Section 2923h].

          9)Makes a legislative findings and declarations that a loan  
            servicer acts in the best interest of all parties if it agrees  
            to, or implements a loan modification or workout plan in one  
            of the following circumstances:

             a)   The loan is in payment default, or payment default is  
               reasonably foreseeable; or,

             b)   Anticipated recovery under the loan modification or  
               workout plan exceeds the anticipated recovery through  
               foreclosure on a net present value basis. [Section 2923.6].

          10)Provides that a notice of sale may not be given for 90 days  
            in order for parties to pursue a loan modification.  [Section  
            2923.52].

          11)Specifies that a servicer can get an exemption from the  
            90-day foreclosure moratorium if they demonstrate proof of a  








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            comprehensive modification program.  [Section 2923.53]

          12)Requires that upon posting of a notice of sale, the  
            mortgagee, trustee, beneficiary or authorized agent shall mail  
            to the borrower a notice in English and Spanish, Chinese,  
            Tagalog, Vietnamese, or Korean that states:
               
             "Foreclosure process has begun on this property, which  
             may affect your right to continue to live in this  
             property. Twenty days or more after the date of this  
             notice, this property may be sold at foreclosure. If you  
             are renting this property, the new property owner may  
             either give you a new lease or rental agreement or  
             provide you with a 60-day eviction notice.  However,  
             other laws may prohibit an eviction in this circumstance  
             or provide you with a longer notice before eviction. You  
             may wish to contact a lawyer or your local legal aid or  
             housing counseling agency to discuss any rights you may  
             have."  [Section 2924.8].

          13)Provides that a notice of sale postponement may occur at any  
            time prior to the completion of a sale for any period of time  
            not to exceed a total of 365 days from the date set in the  
            notice of sale.  [Section 2924g]

          14)Specifies that if sale proceedings are postponed for a period  
            totaling more than 365 days, the scheduling of any further  
            proceedings shall be preceded by giving a new notice of sale.   
            [Section 2924g]

           FISCAL EFFECT  :  Unknown

           COMMENTS  :   

          How would the MMWP operate?  A borrower would have two separate  
          opportunities (amendments are needed to clarify this) to request  
          mediation under the program.  First, when the servicer notifies  
          the borrower that they are delinquent on their mortgage the  
          letter would include notification that the borrower has a right  
          to request mediation, as well as, the contact information for  
          the Administrator of the program.  From the point of receiving  
          the letter the borrower would have 30 days to request to  
          participate in the program.  In the event a borrower has not yet  
          requested mediation and becomes in default, the notice of  
          default would include an additional opportunity to request  








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          mediation.  After requesting mediation, the borrower would have  
          10 days to submit the required documentation to the  
          administrator and in the event of a request occurring after an  
          NOD has been filed; the borrower would also have to deposit 50  
          percent of his monthly mortgage payment with the administrator  
          as a sign of good faith.  Once mediation is requested, the  
          foreclosure process stops until the mediation sessions are  
          either, concluded, or the borrower fails to meaningfully  
          participate in the program.  After a servicer receives notice  
          that the borrower has elected to participate in the program, the  
          servicer has 10 days to submit the following documentation, as  
          well as, required fees to the administrator such as,

          1)The applicable Pooling and Service Agreement, if any;

          2)The loan application, loan origination documents, appraisal,  
            and payment history; 

          3)The original note and assignments or certificate regarding a  
            lost document; 

          4)Documentary evidence of current ownership or chain of custody  
            of the mortgage note; and, 

          5)The net present value formula that the mortgagee, trustee,  
            beneficiary, or authorized agent uses.

          If the servicer does not submit the required documentation or  
          fees, the mediation program is suspended until such items are in  
          compliance.  Additionally, neither the foreclosure process, nor  
          the mediation session shall continue until the servicer provides  
          the required documents.

          Once the case is officially in mediation, the first mediation  
          must be scheduled within 15 days.  The mediator is required to  
          ensure that the MMWP will be completed within 60 days.  Once the  
          mediation session(s) are finished the mediator is required to  
          issue a report to the Administrator stating whether the parties  
          reached a mutually acceptable solution.  A key concept present  
          in this process is that the mediator can't compel the parties to  
          any specific result.  Additionally, the bill requires that the  
          Administrator must report to the legislature on the progress of  
          the mediation program.

          Assembly Banking and Finance conducted two oversight hearings  








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          specific to loan modifications and mediation on October 13, 2009  
          and November 12, 2009 (documents from those hearings may be  
          found at  http://asm.ca.gov/acs/newcomframeset.asp?committee=3  ).   
           Those hearings examined the potential use of mediation as a  
          solution to foreclosures.  

          Testimony provided at these hearings provided numerous insight  
          into the foreclosure issue from the perspective of servicers,  
          housing counselors, community groups and individual borrowers.   
          The common thread of complaints among community groups and  
          individual borrowers has been a lack of response from servicers  
          regarding loan modification requests.  While, the numbers have  
          slightly improved since the committee conducted those hearings,  
          borrowers and community groups continue to raise these issues.   
          Based on the information gathered at those hearings the authors  
          of AB 1639 decided to move forward with a foreclosure mediation  
          bill.  Additionally, in preparation for the aforementioned  
          hearings, Committee staff was contacted by several borrowers  
          with stories of delay, lost paperwork, frustration with servicer  
          call centers and other obstacles to receiving help.  In one  
          particular case a borrower submitted documentation that they had  
          received three different modification offers each one different  
          and in conflict with the other, and the servicer's contact  
          person changed four times.  Finally, even while receiving  
          numerous modification offers, the foreclosure process continued.  
           The authors of this bill contend that a foreclosure mediation  
          process would provide an avenue for borrowers to reach some type  
          of mutual agreement with their servicers.  AB 1639 does not  
          mandate loan modifications, but encourages both parties to reach  
          a resolution.  Additionally, the authors find that a mediation  
          process can help distinguish between those borrowers who really  
          need and can be assisted versus those borrowers that can not be  
          helped by modification but are perhaps given false hope through  
          the continuing contention that federal programs will offer  
          assistance.

          Nevada, Connecticut, New Jersey, Florida, Maine and Illinois  
          have all instituted some form of foreclosure mediation programs  
          over the last year.  On April 13, 2010 the Maryland legislature  
          approved a bill that established a foreclosure mediation  
          program.  Additionally, local jurisdictions are also engaging in  
          mandatory mediation programs such as the cities of Philadelphia  
          and Milwaukee.   The majority of these foreclosure mediation  
          programs are less than one year old so data regarding their  
          performance is limited.  At this point, Nevada has data for the  








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          first six months of their program:

           Notices of Default filed:  29,242 (July through October)

           Requests for mediation:   3,446 

           Mediations conducted:     372

           Mediations scheduled:      805

           Cases scheduled              1,402

          On April 14, 2010, the Congressional Oversight Panel (COP) for  
          the Troubled Asset Relief Program (TARP) issued its April report  
          "Evaluating Progress of TARP Foreclosure Mitigation Programs."   
          The COP report reveals that "Treasury's response continues to  
          lag well behind the pace of the crisis."  Overall, the report  
          points out that Treasury did not establish performance standards  
          for servicers, and that no remedies exist when services do not  
          fulfill the requirements of programs such as HAMP.  Other  
          findings and conclusions from the report include:

               "The Panel adopted this report with a 3-1 vote on April 13,  
               2010.  Treasury's response continues to lag well behind the  
               pace of the crisis. As of February 2010, only 168,708  
               homeowners have received final, five-year loan  
               modifications - a small fraction of the 6 million borrowers  
               who are presently 60+ days delinquent on their loans. For  
               every borrower who avoided foreclosure through HAMP last  
               year, another 10 families lost their homes. It now seems  
               clear that Treasury's programs, even when they are fully  
               operational, will not reach the overwhelming majority of  
               homeowners in trouble. Treasury's stated goal is for HAMP  
               to offer loan modifications to 3 to 4 million borrowers,  
               but only some of these offers will result in temporary  
               modifications, and only some of those modifications will  
               convert to final, five-year status. Even among borrowers  
               who receive five-year modifications, some will eventually  
               fall behind on their payments and once again face  
               foreclosure. In the final                          
               reckoning, the goal itself seems small in comparison to the  
               magnitude of the problem?

               ?The long delay in dealing effectively with foreclosures  
          underscores the need for                               Treasury  








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          to get its new initiatives up and running quickly, but it also  
          underscores                                            the  need  
          for Treasury to get these programs right. Even if Treasury's  
          recently announced                                     programs  
          succeed, their impact will not be felt until early 2011 - almost  
          two years                                              after the  
          foreclosure mitigation program was first launched - and more  
          than three                                             years  
          after the first foreclosure mitigation program was undertaken."

           Where have we been, where are we now, where are we going?
           
          According to the latest report from the Office of the Inspector  
          General for the Troubled Asset Relief Program (SIGTARP) issued  
          March 25, 2010, 2.8 million Americans received a foreclosure  
          filing in 2009 and millions more are expected to receive a  
          filing in 2010.
          
          The first major legislative effort in California to tackle the  
          growing foreclosure crisis was the introduction of Senate Bill  
          1137 (Perata, Corbett, Machado) Chapter 69, Statutes of 2009.   
          The intent of SB 1137 was to ensure that servicers contact  
          borrowers prior to the first filing of the foreclosure process,  
          at least 30 days prior to filing a notice of default NOD,  
          servicers must either make contact to borrowers or satisfy due  
          diligence requirements.  Contact with the borrower must be in  
          person or by telephone "in order to assess the borrower's  
          financial situation and explore options for the borrower to  
          avoid foreclosure." The borrower must be advised that he or she  
          has the right to request a subsequent meeting, and if requested,  
          the meeting must be scheduled to occur within 14 days. The  
          borrower must be provided with the toll-free telephone number  
          made available by the United States Department of Housing and  
          Urban Development to find a HUD-certified housing counseling  
          agency.   Servicers could then file a NOD if, with the filing,  
          they certify that they have made efforts to contact the  
          borrower.  Early, after the passage of SB 1137 the filing of  
          NODs dropped significantly for a few months, but eventually  
          climbed back up as servicers started to understand the steps  
          needed for compliance.

          On February 20, 2009 the Governor signed the California  
          Foreclosure Prevention Act (CFPA) as an urgency statute.   
          Implementation of the CFPA occurred 90 days after the signing of  
          the bill and subsequent to California's three mortgage  








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          regulators (DFI, DOC and DRE) drafting emergency regulations,  
          culminating on June 1, 2009.  The CFPA modified the foreclosure  
          process by providing for a delay of 90-days to give borrowers an  
          opportunity to work with their servicers on a loan modification.  
           However, a 90-day delay in foreclosure proceedings does not  
          apply in those cases where a mortgage loan servicer has received  
          an exemption based on the existence of a comprehensive loan  
          modification program.   In addition to the specific  
          characteristics a comprehensive program as outlined in the  
          legislation, participation in the Home Affordable Modification  
          Program (HAMP) was deemed sufficient to receive an exemption  
          from the moratorium.  The majority of mortgage loan servicers  
          operating in the state have received an exemption from the  
          90-day foreclosure moratorium (More information on those who  
          have received exemptions can be found at  
           http://www.corp.ca.gov/FSD/CFP/default.asp  ).   The CFPA does not  
          require an individual to receive a modification, only that a  
          servicer has a program in place.

          On February 18th, 2009, President Obama announced a  
          multi-pronged approach to deal with the foreclosure crisis  
          through the use of mortgage refinancing and mortgage  
          modification.  

          The Making Home Affordable Program (MHAP) is part of the Obama  
          Administration's broad, comprehensive strategy to get the  
          economy and the housing market back on track. MHAP offers two  
          different potential solutions for borrowers: (1) refinancing  
          mortgage loans, through the Home Affordable Refinance Program  
          (HARP), and (2) modifying mortgage loans, through HAMP.   HAMP  
          is the tip of the spear in the government's attempt to mitigate  
          foreclosures.   

          How does HAMP work?  In order to be eligible for HAMP, the  
          borrower must be in default (60 or more days late) or be at risk  
          of imminent default.  The property must be owner-occupied and  
          have a maximum unpaid principal balance of $729,750 and the  
          mortgage must have been originated by January 1, 2009.  Once the  
          mortgage meets the criteria the servicer undertakes a net  
          present value test (NPV) to determine whether modification,  
          foreclosure, or foreclosure alternatives are in the best  
          interest of the mortgage holder.  If the model generates a  
          positive value for modification, meaning that loss to the owner  
          of the mortgage would be less than foreclosure then HAMP  
          participating servicers are required to offer a modification so  








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          long as modification is not prohibited by investors.  Once the  
          aforementioned criteria are met the servicer follows HAMP's  
          "waterfall" formula in order to design a modification that will  
          result in a front end (meaning costs of housing, property taxes,  
          property insurance and HOA dues) debt to income (DTI) ration of  
          31 percent.  The "waterfall" is a series of steps that go in  
          order until the DTI is close to 31 percent as possible.  The  
          following are the "waterfall" steps:

          1)Capitalize all outstanding interest, escrow advances and third  
            party fees, and waive late fees for borrowers who meet trial  
            modification guidelines.

          2)Reduce mortgage interest rate in increments of .125 percent  
            with a floor of two percent.

          3)Extend term of mortgage up to 480 months (40 years) from the  
            modification date.  

          4)Provide non-interest bearing and non-amortizing principal  
            forbearance.

          In order to encourage participation in the program, Treasury  
          pays incentives using Troubled Asset Relief Program (TARP)  
          funds.  If a servicer makes modification to the get the  
          homeowner down to a 38 percent DTI, Treasury will provide 50  
          percent of the costs of the modification to get the loan  
          modified to the target 31 percent DTI.  Payments are made only  
          after the modification becomes permanent and last for up to five  
          years, or until the loan is paid off, whichever is earlier.   
          HAMP also includes the following incentive programs:

          1)Servicers will receive an up-front incentive payment of $1000  
            for each permanent modification.  They will also receive pay  
            for success payments as the borrower stays in the program, of  
            up to $1000 each year for up to three years.

          2)Borrowers are eligible to receive a pay-for-performance  
            success payment that goes straight toward reducing the  
            principle balance on the mortgage loan of up to $1000 per  
            monthly payment for up to five years.

          3)One-time bonus incentive payments of $1,500 to investors and  
            $500 to servicers will be provided for modifications made  
            while the borrower is still current on mortgage payments, but  








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            in danger of imminent default.

          Principle forgiveness is not required under HAMP, however recent  
          changes to HAMP address this issue and will be discussed later  
          in this analysis.  

          Over a year after its implementation the reviews are mixed as  
          over a million trial modifications have been offered, yet only  
          169,000 have been made permanent.  Several factors have  
          contributed to this performance such as program guidelines that  
          have changed many times.  A major change just recently announced  
          is the requirement of income verification at the time of  
          starting the trial modification, which is set to begin mid-April  
          of 2010.  Prior to this change, servicers were allowed to use  
          undocumented income declarations from the borrower to make a  
          determination for a trial modification.  During the three month  
          trial period servicers attempt to verify income through proper  
          documentation.  This process may have been a contributing factor  
          to the low permanent loan modification numbers thus far.

          A report, "Factors Affecting Implementation of the Home  
          Affordable Modification Program", issued March 25, 2010 by  
          SIGTARP reveals several obstacles and difficulties that plague  
          HAMP even a year after its inception.   Since HAMP started, it  
          has undergone 11 program changes and updated directives and an  
          additional 9 changes to its NPV model.    The following are a  
          few of the issues identified by SIGTARP:

          1)Five of the HAMP servicers visited by SIGTARP for the audit  
            covered in the report, mentioned that they lacked guidance on  
            identifying and determining eligibility for borrowers at  
            imminent risk of default on privately owned mortgages  
            (Non-GSE).

          2)Some servicers have told borrowers that they must be in  
            default to be considered for a modification even though HAMP  
            provides help for those facing default.

          3)Servicers are still undergoing challenges in maintaining and  
            training staff to handle modifications.

          4)Marketing of the availability of HAMP as an option has been  
            limited by a lack of guidance from Treasury and servicer  
            specific delays.









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          5)Treasury informed SIGTARP that potentially only 50-66 percent  
            of estimated three million trial modifications will convert to  
            permanent status.

          In testimony before the U.S. House Committee on Oversight and  
          Government Reform (March 25, 2010), the Acting Comptroller  
          General of the United States, Gene L. Dodaro testified to the  
          difficulties faced by the HAMP program based on findings from  
          the Government Accountability Office (GAO).  The following are  
          some of the HAMP issues highlighted by the GAO:

          1)Treasury has not yet finalized remedies or penalties for  
            servicers who are not in compliance with HAMP guidelines.

          2)Each major program change has required servicers to update  
            computer systems, adjust business practices and retrain  
            servicing staff.

          3)Ten servicers contacted by GAO had 7 different sets of  
            criteria for determining whether borrowers who were not yet 60  
            days delinquent qualified for HAMP.

          4)Although Treasury guidelines state that servicers must provide  
            borrowers with information designed to help them understand  
            the modification process and must respond to HAMP inquires in  
            a timely manner, the HAMP servicers contacted by GAO varied  
            widely in the timeliness and content of their initial  
            communications with borrows about HAMP.  Some servicers  
            contacted borrowers about HAMP as soon as payment was 30 day  
            delinquent, and other servicers did not inform borrowers until  
            they were at least 60 days delinquent.

          5)Treasury has not developed standards to evaluate servicers'  
            performance in communicating with borrowers or penalties for  
            servicers that do not meet Treasury's requirements.

          6)Servicers do not have a systematic process for tracking HAMP  
            complaints.

          The GAO also reported that the numerous program changes to HAMP  
          and often, a lack of clarity on certain provisions have made the  
          program less effective than it could be.

          Servicer guidance on the implementation of HAMP is governed by  
          Supplemental Directives issued by the Treasury Department.   








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          These directives can be found at  
           https://www.hmpadmin.com/portal/programs/directives.html  .   

          The most recent change to HAMP, announced on March 26th, 2010  
          involves program changes intended to address unemployed  
          borrowers, negative equity and the concurrent pursuant of a  
          foreclosure while a loan is being reviewed for modification.   
          According the limited details released, the new enhancements  
          will require servicers to provide 3-6 months of temporary  
          forbearance for eligible unemployed borrowers, after which they  
          will be evaluated for a HAMP modification.  Second, servicers  
          will be encouraged through various incentives to consider  
          principle reductions for loans that are over 115 percent of  
          current value of the property.  Finally, guidance will be  
          forthcoming on the issue of borrowers who continue to face the  
          foreclosure process while under evaluation for a HAMP  
          modification.  These guidelines will provide clarification on  
          protections for borrowers from foreclosure actions who are under  
          consideration for a modification.
           
           The contention among some industry groups is that the federal  
          response to foreclosures could be complicated or otherwise  
          frustrated by implementing a statewide foreclosure mediation  
          program.  At this point, nothing in AB 1639 directly conflicts  
          with ongoing loan modification efforts.  Actually, getting  
          borrows and sevicers in the same room with a neutral third party  
          could expedite modifications under the HAMP program by ensuring  
          that both parties communicate and possess all the necessary  
          documentation to evaluate a need for modification.  On the other  
          hand, a mediation session would reveal very clearly to a lender  
          whether a borrower has a realistic ability to pay their  
          mortgage.  Additionally, the design of the mediation program  
          proposed in this bill follows current California law on  
          mediation in that the result of the mediation cannot be  
          compelled upon the parties.  For example, a mediator can only  
          assist the discussion and offer advice, but that assistance is  
          non-binding.
           
           Finally, an additional issue that has been raised are concerns  
          "strategic default."  Strategic default is when a borrower, who  
          can otherwise afford their mortgage payment, is in a negative  
          equity position and decides to go into default, either to walk  
          away from the mortgage or compel the servicer to negotiate a  
          loan modification.  Studies on the issue of strategic default  
          tend to examine previous down turns, or engage in surveys to  








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          gauge general attitudes about mortgage default and its  
          interaction with negative equity positions.   In a study from  
          July of 2009, "Moral and Social Constraints to Strategic Default  
          on Mortgages" the authors, while finding that when negative  
          equity reaches the 50 percent mark, borrowers are 17 percent  
          more likely to default, still found that,  "It is difficult to  
          study the strategic default decision, because it is de facto an  
          unobservable event. While we do observe defaults, we cannot  
          observe whether a default is strategic."  This study attempted  
          to reach correlations on strategic default even though by the  
          authors own admission strategic defaults are not observable for  
          the purposes of study.  At this point, the additional evidence  
          is mostly anecdotal as found in newspapers and other media  
          outlets.  Certainly, strategic default occurs, but to what  
          extent, it is difficult to determine.  Would AB 1639 provide  
          more motivation for strategic default?  It doesn't seem likely,  
          as the borrower would have to produce for the mediator evidence  
          of their financial situation.
           
          Can face-to-face meetings work?

           In research conducted thus far, it appears that face-to-face  
          meetings between borrower and servicer can, and do work.  For  
          example, while credit unions have foreclosure rates below 1  
          percent, they have demonstrated success with assisting their  
          borrowers on a case by case basis to assess their chances at  
          modification.  Additionally, many of the large banks/servicers  
          conduct town hall meetings that encourage borrowers to show up  
          with necessary documentation and conduct modification  
          assessments on the spot.  The benefit of a face-to-face  
          interaction seems to be so beneficial that 27 of these types of  
          events are officially scheduled over the next year in  
          California.

           Amendments and other issues.

           If the committee wishes to see any amendments to this bill, they  
          will have to be adopted after the bill leaves this committee due  
          to the timing constraints policy committee hearings (Judiciary  
          is schedule to hear this bill the following day).

          The committee recommends that going forward the following  
          questions and/or amendment suggestions are addressed:

          1)Create language that provides that if a servicer has already  








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            met face-to-face with a borrower, or has documented evidence  
            of a loan modification offer, then the servicer would be  
            exempt from the requirement to participate.

          2)Establish a sunset of January 1, 2014.

          3)Clarify that borrowers who request mediation prior to the  
            filing of a NOD may not request mediation subsequent to the  
            filing.

          4)Change a technical issue regarding fee reimbursement so that  
            the borrower reimburses the servicer for 50 percent of the  
            cost of the mediation sessions.

          5)If necessary, adjust the timelines in the bill to ensure that  
            resolution of the mediation sessions occur faster than  
            currently proscribed.  For example, the current timeframe  
            requires that the mediation session(s) should be completed  
            within 60 days.  The authors may want to consider decreasing  
            this time to 30 or 45 days.

          6)Should servicers be allowed to request mediation with an  
            unresponsive borrower?  Under this approach, either party  
            involved in the foreclosure can request mediation.
           
          Related State Legislation  .

          AB 2024 (Blumenfield), Provides that any lender or servicer that  
          rejects a loan modification request shall respond to the  
          borrower making the request within 7         days via certified  
          mail with the specific reasons why the request was rejected.   
          Additionally requires that the response must comply with certain  
          language translation requirements.
          Status: In Assembly Banking & Finance Committee

          AB 2236 (Monning), requires a mortgagee, trustee, or  
          beneficiary, or an                           authorized agent of  
          that person, to include on all notices informing a borrower that  
          he or she has either failed to make a required minimum payment  
          or failed to make a payment when due, the name and the contact  
          information, including the address and telephone number, of the  
          mortgagee, trustee, beneficiary, or authorized agent who has the  
          authority pursuant to state and federal law to modify the terms  
          and conditions of the borrower's loan.
          Status: In Assembly Banking & Finance Committee.








                                                                  AB 1639
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          AB 2189 (Ma), requires a loan modification agreement to be  
          translated into one of five non-English languages if the  
          original mortgage was negotiated in that language.
          Status: In Assembly Banking & Finance Committee

          AB 2678 (Fuentes), prohibits a notice of sale from being issued,  
          if the mortgagee, trustee, beneficiary or authorized agent is  
          currently in negotiations with a                  borrower on a  
          loan modification.
          Status: In Assembly Banking & Finance Committee.

          SB 1275 (Leno, Steinberg), requires a mortgagee, trustee,  
          beneficiary, or     authorized agent, prior to the filing of a  
          notice of default, to provide the borrower with an application  
          for a loan modification and other foreclosure avoidance options  
          and a specified notice regarding the borrower's rights during  
          the                 foreclosure process.  Prohibits the  
          mortgagee, beneficiary, or authorized agent from combining  
          collections activity with communication with the borrower about  
          foreclosure avoidance options. Deletes the requirement that the  
          notices of default  contain a specified declaration, and would  
          instead require the mortgagee, beneficiary, or authorized agent  
                 to, concurrently with the filing of a notice of   default,  
          record a declaration of compliance that attests to specified  
          facts, and mail the borrower a notice stating that these  
          requirements have been met.  Provides that failure to record a  
          declaration of compliance, or recordation of a declaration of  
          compliance that fails to meet the specified requirements, would  
          constitute grounds for the borrower to bring an action to void  
          the foreclosure, or to recover either treble damages or  
          statutory damages in the amount of $10,000, whichever is  
          greater, from the mortgagee, trustee, beneficiary, or authorized  
          agent.
          Status: In Senate Banking, Finance & Insurance Committee.

          SB 1427 (Price), requires a notice of default to include a  
          statement that identifies     the name, address, telephone, and  
          e-mail address of any person or entity that is designated to be  
          responsible for the maintenance of the property for which the  
          deed of trust is recorded.  Existing law requires a legal owner  
          to maintain vacant residential property purchased at a  
          foreclosure sale, or acquired by that owner                  
          through foreclosure under a mortgage or deed of trust;  
          authorizes a governmental entity to impose civil fines and  








                                                                  AB 1639
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          penalties for failure to maintain that property of up to $1,000  
          per day for a violation; and provides that these statutory  
          provisions do not preempt any local ordinances and prohibits a  
          governmental entity from imposing fines on a legal owner under  
          both these provisions and a local ordinance. This bill would  
          provide that these statutory provisions preempt any local  
          ordinance and provides that any fines or penalties imposed for  
          failure to maintain a property are the obligation of the     
          legal owner and that these fines would be treated as a lien  
          against the property in a foreclosure sale.
          Status: In Senate Judiciary Committee

           Related Federal Legislation  .
                      
          Both H.R. 4635 (Fudge et al.) and S. 2912 (Nelson) provides that  
          prior to beginning the foreclosure process the foreclosing  
          entity must participate in a mediation session consistent with  
          any state or local foreclosure mediation programs.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          The City of Los Angeles , Mayor Antonio Villaraigosa (Sponsor)
          California Dispute Resolution Council
          Consumers Union

           Opposition 
           
          California Bankers Association
          California Building Industry Association
          California Chamber of Commerce
          California Credit Union League (CCUL)
          California Financial Services Association
          California Independent Bankers
          California Land Title Association
          California Mortgage Bankers Association
          Securities Industry and Financial Markets Association
          The Civil Justice Association of California (CJAC)
          United Trust Association
           
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081