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California's Foreclosures: Numbers Fall, But Hold Off Celebration

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cnbc

Default filings in California fell a whopping 62 percent in September from the month before, according to ForeclosureRadar.com, a California foreclosure search and data site.

But before you go thinking the crisis is over, look behind the number and you’ll find another number: California Senate Bill 1137.

This new law was designed to encourage loan modifications by requiring the lenders to contact borrowers who are in trouble and then wait at least 30 days before foreclosing. But that’s all the law does--delay.

“We expect SB 1137 to have no long-term impact beyond delaying the foreclosure process for homeowners and slowing the overall recovery,” said Sean O’Toole, ForeclosureRadar.com founder.

The 62 percent drop is in initial defaults, the first stage of foreclosure. The number of properties taken to sale at auction, the final stage, rose 163 percent in September compared to the year before. O’Toole believes the new law does nothing but muddy the numbers and delay the inevitable; successful modifications, he says, are still few and far between:

“Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions or extending the unsustainable teaser rates that created the foreclosure crisis in the first place,” said O’Toole in a statement. Then, he and others have noted, the principal reductions are risky because they are already causing some homeowners to default on purpose just to get the reductions.

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I’m also hearing from mortgage bankers that lenders are slow to reduce principal, especially this week, as they are now waiting to see what loans the government buys as part of the big ol’ $700 b bailout. No reason to drop the principal if the government is about to buy up the loans in full, right?

Questions? Comments? RealtyCheck@cnbc.com