LOS ANGELES—California's foreclosure prevention laws performed better than the federal government's policy during the early 2000s financial crisis, according to a new economic letter from UCLA Ziman Center for Real Estate and the UCLA Anderson Forecast. Stuart A. Gabriel, Arden Realty Chair, professor of finance at UCLA Anderson School of Management, and director at UCLA Ziman Center; Matteo Iacoviello, chief economist of trade and financial studies section in the division of international finance, and on the board of governors of the Federal Reserve System; and Chandler Lutz, associate professor in the Department of Economics at Copenhagen Business School, took an in-depth look at how the California Foreclosure Prevention Laws performed during the crisis period, and they found that these policies reduced foreclosures by 16%, preventing 380,000 California borrowers from losing their homes. As a result of these policies, home prices increased by 6%, which created $300 billion of housing wealth. This report is the first analysis of these laws. To get a closer look inside this research, we sat down with Gabriel for an exclusive interview.

GlobeSt.com: You are the first to evaluate the foreclosure laws and the impact these laws had on the recent mortgage crisis. What motivated you to look into this issue?

Stuart A. Gabriel: This is an effort to understand what policy works and what policy doesn't work in the midst of a severe housing crisis. The study was motivated in part by the fact that the US government policy, which was called HAMP, really did not work and it failed to reach its targeted borrowers. We have an alternative policy in California, and we really wanted to see if the California policy was more successful in ameliorating foreclosures and easing the crisis.

GlobeSt.com: Why do you think that California's foreclosure policy was so effective?

Gabriel: It was effective because it did not require the borrower and the lender to agree on anything or even to negotiate with one another. It simply imposed delays on lender foreclosure activity, it made foreclosures more onerous to lenders and it also imposed moratoria on those lenders that failed to enact comprehensive and broad-based mortgage modification programs. Rather than getting into the mortgage-by-mortgage negotiation that was associated with the federal program, the California program sort of treated everyone. It set up a whole bunch of restrictions that in essence incented mortgage modifications and reduced foreclosures.

GlobeSt.com: How does California's foreclosure laws differ from policies regarding foreclosure in other states?

Gabriel: There are basically two kinds of states: states where foreclosures are required to go through the court system, which are called judicial foreclosure states, and states that are not required to go through the states, which are called non-judicial foreclosure states. California was in the latter group, and this legislation that we studied really pushed California in the direction of a judicial foreclosure state. Not because we were required to go through the judiciary, but because there were more delays in the system that were similar to judicial foreclosure states. It turns out that the states that were judicial foreclosure states did better in the crisis than the ones that were non-judicial foreclosure states. That is really interesting because it means that not throwing all of these foreclosures onto the market all at once was actually helpful in allowing the judicial foreclosure states to recover.

GlobeSt.com: How did the real estate community react to this change at the time?

Gabriel: One of our suspicions was that lenders in California actually did not object to the state imposing moratoria on foreclosures. That is a speculation on our part; we don't have any proof of that, but the reason that we are guessing that is the case is because there was literally a downward spiral in home prices, and if a lender could take less of this product back into their portfolio, it would mean reducing losses on lender balance sheets, even to the point of allowing some lenders to survive in a very difficult context. You would think on face value, lenders would oppose the moratoria on face value, but we can't find any evidence of that.

GlobeSt.com: Do you think that California is better prepared now to deal with a similar crisis, if one were to happen in the future?

Gabriel: My short answer is no. We were ground zero to the crisis, and it so it hit very hard in California. Secondarily, the interesting thing about these laws is that no one but us has ever looked at them and those legislators that were associated with these laws have either been term limited out or have otherwise disappeared, so there was no evaluation of these laws on the part of the state legislature, and I don't think anyone there is particularly aware of them. I would guess that our political and institutional memory is rather short.

LOS ANGELES—California's foreclosure prevention laws performed better than the federal government's policy during the early 2000s financial crisis, according to a new economic letter from UCLA Ziman Center for Real Estate and the UCLA Anderson Forecast. Stuart A. Gabriel, Arden Realty Chair, professor of finance at UCLA Anderson School of Management, and director at UCLA Ziman Center; Matteo Iacoviello, chief economist of trade and financial studies section in the division of international finance, and on the board of governors of the Federal Reserve System; and Chandler Lutz, associate professor in the Department of Economics at Copenhagen Business School, took an in-depth look at how the California Foreclosure Prevention Laws performed during the crisis period, and they found that these policies reduced foreclosures by 16%, preventing 380,000 California borrowers from losing their homes. As a result of these policies, home prices increased by 6%, which created $300 billion of housing wealth. This report is the first analysis of these laws. To get a closer look inside this research, we sat down with Gabriel for an exclusive interview.

GlobeSt.com: You are the first to evaluate the foreclosure laws and the impact these laws had on the recent mortgage crisis. What motivated you to look into this issue?

Stuart A. Gabriel: This is an effort to understand what policy works and what policy doesn't work in the midst of a severe housing crisis. The study was motivated in part by the fact that the US government policy, which was called HAMP, really did not work and it failed to reach its targeted borrowers. We have an alternative policy in California, and we really wanted to see if the California policy was more successful in ameliorating foreclosures and easing the crisis.

GlobeSt.com: Why do you think that California's foreclosure policy was so effective?

Gabriel: It was effective because it did not require the borrower and the lender to agree on anything or even to negotiate with one another. It simply imposed delays on lender foreclosure activity, it made foreclosures more onerous to lenders and it also imposed moratoria on those lenders that failed to enact comprehensive and broad-based mortgage modification programs. Rather than getting into the mortgage-by-mortgage negotiation that was associated with the federal program, the California program sort of treated everyone. It set up a whole bunch of restrictions that in essence incented mortgage modifications and reduced foreclosures.

GlobeSt.com: How does California's foreclosure laws differ from policies regarding foreclosure in other states?

Gabriel: There are basically two kinds of states: states where foreclosures are required to go through the court system, which are called judicial foreclosure states, and states that are not required to go through the states, which are called non-judicial foreclosure states. California was in the latter group, and this legislation that we studied really pushed California in the direction of a judicial foreclosure state. Not because we were required to go through the judiciary, but because there were more delays in the system that were similar to judicial foreclosure states. It turns out that the states that were judicial foreclosure states did better in the crisis than the ones that were non-judicial foreclosure states. That is really interesting because it means that not throwing all of these foreclosures onto the market all at once was actually helpful in allowing the judicial foreclosure states to recover.

GlobeSt.com: How did the real estate community react to this change at the time?

Gabriel: One of our suspicions was that lenders in California actually did not object to the state imposing moratoria on foreclosures. That is a speculation on our part; we don't have any proof of that, but the reason that we are guessing that is the case is because there was literally a downward spiral in home prices, and if a lender could take less of this product back into their portfolio, it would mean reducing losses on lender balance sheets, even to the point of allowing some lenders to survive in a very difficult context. You would think on face value, lenders would oppose the moratoria on face value, but we can't find any evidence of that.

GlobeSt.com: Do you think that California is better prepared now to deal with a similar crisis, if one were to happen in the future?

Gabriel: My short answer is no. We were ground zero to the crisis, and it so it hit very hard in California. Secondarily, the interesting thing about these laws is that no one but us has ever looked at them and those legislators that were associated with these laws have either been term limited out or have otherwise disappeared, so there was no evaluation of these laws on the part of the state legislature, and I don't think anyone there is particularly aware of them. I would guess that our political and institutional memory is rather short.