California Foreclosures on the Rise Again

Bay Area Foreclosure AttorneyWhile it may not have felt that way to anyone in the Bay Area facing a possible foreclosure over the last year, the initiation of the foreclosure process—the recording of a Notice of Default by the mortgage lender—had been in decline over the first two quarters of this year. That was then. As reported by the L.A. Times and NPR this week, foreclosures turned up sharply during the most recent quarter, July through September, with a whopping 19% increase in states like California where most foreclosures are carried out through nonjudicial trustee sales. This surge in new foreclosure activity by the big banks signals that they intend to act more aggressively against homeowners in the Bay Area and elsewhere in California now that some of the spotlight over the “robosigning” scandal has faded a bit.

In our San Jose bankruptcy practice, I meet with homeowners nearly every day who have been told by their mortgage lenders (though the lenders never admit this in writing or in the press) to go ahead and stop making payments if they hope to qualify for a loan modification. It is common knowledge that mortgage lenders will not consider a request for a loan modification coming from a homeowner who is current on their loan. Why? Simple: that homeowner doesn’t present any real risk to the lender. If homeowner is current with her payments, the mortgage lenders don’t seem to see the broader logic in  making the property more affordable long term and thus avoiding a foreclosure further down the road.

Now that the lenders are moving more aggressively to initiate foreclosures by recording NODs, I fear that this signals that they are becoming even less serious about their already flimsy commitment to the loan modification process. Where the banks refuse to work with homeowners to keep them in their homes, bankruptcy will inevitably again become the only option available to those homeowners for whom a Chapter 13 bankruptcy might help save their homes. Unfortunately, as I have written before, Chapter 13 bankruptcy can only do so much to avoid a foreclosure. True, if the first loan is greater than the current value of the home, we can frequently strip off second loans from a property—assuming a viable Chapter 13 that will get confirmed, of course—and lien stripping can go a long way toward helping some stay in their homes. But if the homeowner cannot feasibly pay off the arrearage owed on the first loan through a Chapter 13 payment plan, all the while staying current on his first loan going forward, then it is impossible for bankruptcy to offer a permanent solution to the homeowner facing an inevitable foreclosure.

Given that we are now going to see another upsurge in foreclosure sales again in California, it then becomes all the more important for homeowners to get advice from an experienced Bay Area bankruptcy attorney. If there are any recourse loans on the property (home equity lines of credit, for example), then that personal liability must be discharged in bankruptcy in order to avoid law suits and judgments on that debt in the future. Moreover, a bankruptcy discharge of that personal liability for those recourse loans must occur before the foreclosure is final if the debtor is to fully escape 1099 tax liability on the “forgiven” debt. Hence, while bankruptcy may not provide every homeowner with the tools to keep the home long-term, it may be necessary for a completely different reason—to avoid judgments, wage garnishments, and tax liability that can haunt the homeowner for decades after the home has been foreclosed by the lender.

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