California Is Playing With Mortgage Fire

NEW YORK (TheStreet) -- New rules by the California State Legislature and municipalities in San Bernardino County could greatly increase the cost of mortgage loans over the long term for the Golden State.

Two new mortgage servicing bills passed by California lawmakers and a possible radical use of eminent domain to force loan modifications signal a painful new round of challenges for mortgage lenders, loan servicers and investors.

California governor Jerry Brown is expected soon to sign into law two bills passed on Monday by California's Senate and Assembly, which will make permanent key protection rules for mortgage loan borrowers that were set to expire after three years, under the $25 billion settlement between federal regulators, 49 states' attorneys general, and the largest loan servicers -- including Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Ally Financial.

California Governor Edmund G. Brown, Jr.

The two bills will permanently require most lenders or loan servicers "to establish a single point of contact and provide the borrower with one or more direct means of communication with the single point of contact," while also prohibit "dual tracking," which is the practice of continuing to pursue foreclosure while simultaneously negotiating new terms with a residential loan borrower.

While Bank of America and JPMorgan Chase declined to comment on the new California rules, Vickee Adams -- the Vice President for external communications for Wells Fargo Home Mortgage -- says that the lender has been complying with both rules for some time.

Adams says that Wells Fargo's "1:1 Model" was initiated in June 2010 "to assign one point of contact within the organization to handle their loan all the way through modification and resolution to avoid foreclosure," adding that "we are almost 3-4% lower in our foreclosure rates than our competitors so we believe our modification order has been very successful."

The single point of contact for borrowers facing foreclosure became the industry standard for the largest mortgage servicers in April 2011, when the Office of the Comptroller of the Currency, ordered eight national servicers -- including subsidiaries of the "big four" U.S. banks listed above, as well as subsidiaries of HSBC (HBC), MetLife (MET), PNC Financial Services Group (PNC) and U.S. Bancorp (USB) -- to cure various servicing deficiencies. The April 2011 OCC order also prohibits servicers from continuing foreclosure proceedings "once a mortgage has been approved for modification."

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