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California Is Playing With Mortgage Fire

Stocks in this article: BAC C JPM WFC

If the mortgage holder opts for the traditional judicial foreclosure, "it is a very difficult process for a consumer to redeem their property," according to Mayer, who adds that "what will potentially happen is that these cases will go through court, and then the borrower may also be sued personally for attorney fees and costs," on top of a potential deficiency judgment.

Mayer also says the new rules are "unique and different" from the previous regulatory orders against the six banks," because they "give the consumer a right to an injunction to stop the foreclosure process, which can lead to attorney fees and fines against the banks."

So not only do the new laws potentially lead to mortgage holders opting for the more expensive -- and potentially more painful for the borrower -- judicial foreclosure, the increased costs for all parties could raise borrowing costs or stifle credit availability for the consumers the legislators are seeking to help.

Dustin Hobbs, a spokesman for the California Mortgage Bankers Association says that if the California legislation "results in a slew of new frivolous lawsuits and lengthens the foreclosure process, investors will put more of a premium on California loans, which of course will push some borrowers out of the market."

A Blunt Instrument

Another California development that could make it easier for thousands of "underwater" borrowers to stay in their homes, while setting a very painful precedent for lenders and investors in mortgage-backed securities is the possible use of eminent domain to force loan modifications.

San Bernardino County, along with the cities of Fontana and Ontario, have set up the Joint Powers Authority, which is considering what County spokesman David Wirt calls the "intriguing idea" of using eminent domain to take control over mortgage loans with principal balances greatly exceeding property values. Under the proposed program, which would be funded by Mortgage Resolution Partners, a new refinanced loan balance amount that could be supported by the current fair value of the property would be determined, and the investor holding the mortgage would be paid off for that amount.

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