In July of 2008, the California Legislature and the Governor put in place the first real legislative effort to help slow the rising tide of residential foreclosures. The measure was intended to force lenders and borrowers to put their heads together and discuss what options might be available to avoid a foreclosure. The measure has proven to be little more than a speed bump for loan servicers moving toward foreclosure. The bill, SB 1137, added Sections 2923.5, 2923.6, 2923.8 and 2929.3 to the Civil Code, and added Section 1161b to the Code of Civil Procedure. Both the preamble to the bill and the findings declare that the foreclosure crisis in mid-2008 represented an â€œunprecedented threatâ€ to State and local economies, and that it is â€œessentialâ€ to the economic health of California that steps be taken to slow the flood of foreclosures. Looking back, the Legislature had no idea how right they were!
Section 2923.5 was added to the California Civil Code, and requires that prior to initiating a foreclosure (the first, formal step of which is a Notice of Default), the lender make efforts to contact the borrower and discuss with them alternatives to foreclosure. Its clear from the legislative history that the intention was to put lenders and borrowers heads together to discuss modification of the existing loan to avoid foreclosure. Unfortunately, the language in the bill falls short of actually putting any pressure on the lender to make such an accommodation. The bill only requires that during the conversation, the lender and borrower asses the borrowerâ€™s financial situation and discuss â€œoptions.â€ If the borrower requests it, the lender must agree to a subsequent meeting within 14 days. Regardless of whether a meeting is requested, the lender is to give the borrower a toll-free telephone number to reach HUD to assist the homeowner in finding a HUD-certified counseling agency. An important point to note here is that if you, the borrower, appoint an attorney or other advisor to act on your behalf, the statute is clear that the lenderâ€™s contact with that person satisfies the requirement of Section 2923.5 to contact the borrower.
In the event that the borrower cannot be reached telephonically, then the lender must satisfy the required â€œdue diligenceâ€ before proceeding with a foreclosure. Specifically, the statute requires that a lender must:
- First attempt to contact a borrower by sending a first-class letter that includes the toll-free telephone number made available by HUD to find a HUD-certified housing counseling agency:
- After the letter has been sent, the lender shall attempt to contact the borrower by telephone at least three times at different hours and on different days. Telephone calls shall be made to the primary telephone number on file; and
- A lender may attempt to contact a borrower using an automated system to dial borrowers, provided that, if the telephone call is answered, the call is connected to a live representative of the lender; and
- A lender satisfies the telephone contact requirements of this paragraph if it determines, after attempting contact pursuant to this paragraph, that the borrowerâ€™s primary telephone number and secondary telephone number or numbers on file, if any, have been disconnected.
- If the borrower does not respond within two weeks after the telephone call requirements have been satisfied, the lender shall then send a certified letter, with return receipt requested; and
- The lender shall provide a means for the borrower to contact it in a timely manner, including a toll-free telephone number that will provide access to a live representative during business hours; and
- The lender must post a prominent link on the homepage of its Internet Web site, if any, to the following information:
- Options that may be available to borrowers who are unable to afford their mortgage payments and who wish to avoid foreclosure, and instructions to borrowers advising them on steps to take to explore those options.
- A list of financial documents borrowers should collect and be prepared to present to the lender when discussing options for avoiding foreclosure.
- A toll-free telephone number for borrowers who wish to discuss options for avoiding foreclosure with their lender.
- The toll-free telephone number made available by HUD to find a HUD-certified housing counseling agency.
Once either the borrower has been contacted by phone, or the due-diligence period has expired, the lender must then wait 30 days before recording the first Notice of Default which starts the calendar on the foreclosure process. In a previous article, Iâ€™ve discussed the new foreclosure timeline in detail, so please reference that article for more information.
Although Section 2923.5 doesnâ€™t specifically address modifications, the next section added to the Civil Code, Section 2924.8 attempts to stress the desire of the Legislature to have lenders evaluate the value of loan modifications and/or workouts where it would be beneficial to the mortgage holder. This section really has no teeth, and isnâ€™t even a direct part of the prior section which imposes affirmative duties on the lender. This simply suggests that the lender should evaluate these options.
Relief for Innocent Victims of Foreclosure:
One problem in foreclosures that became painfully into focus in 2008 was that of the innocent tenant renting a property which has been foreclosed upon by a bank. In most instances, lenders are not in the business of, nor equipped to actively manage their foreclosures, so they evict tenants post-foreclosure regardless of whether the tenant is good, bad or indifferent. Lenders seem to believe that trying to manage a foreclosure is hard enough, and that having to actively manage a tenant is impossible or financially infeasible, so their policies almost exclusively provide that the tenant be evicted shortly after foreclosure. In 2008, it became clear that landlords who were losing their property in foreclosure were not advising their tenants of the impending foreclosure, and collecting rent right up to, or in many cases, well after the property was foreclosed. You can imagine the pain and stress this can cause a tenant. As such, in this legislation, S.B. 1137, the Legislature tried to balance the rights of the lender to possession of their property with that of the tenants who now face eviction. Civil Code Â§ 2924.8 and Code of Civil Procedure Â§ 1161b were both added which provide for some relief for tenants innocently caught in the foreclosure.
Section 2924.8 provides that when the Notice of Trusteeâ€™s Sale (the last notice in a foreclosure sale â€“ posted, mailed and published about 20 days prior to the sale) is posted on the property, a second notice must be posted on the property. That second notice is intended to give the tenants, in clear language, notice that the property will be taken back by the bank or a buyer at auction, and that the tenants may lose their right to occupy the property. The notice goes on to provide that upon the sale of the property to either the bank, or a new buyer, the new property owner can either enter into a new lease with the tenant(s) or shall give them 60 days notice to terminate their tenancy. Section 1161b of the Code of Civil Procedure is a complimentary section which provides that a tenantâ€™s tenancy may not be terminated on less than 60 days notice where it is being done so after a foreclosure sale. This notice is only required to be given if the billing address for the borrower is different than the property address, so theoretically, if the owner lives in a unit in the building, this notice arguably doesnâ€™t need to be given.Â The new law does provide that it is an infraction (a crime) to remove the notice within 72 hours of its posting. This entire provision only remains enforceable law until January 1, 2013.
Lenders, Clean Up Your REOs!
Section 2929.3 was also added to the Civil Code, requiring that once a lender has recovered the property through foreclosure (notice, it doesnâ€™t appear to cover homes deeded back to the bank through a deed-in-lieu), they must maintain the property. This is a hot-button issue in high foreclosure rate areas, such as â€œForeclosure-Alleyâ€ in the Inland Empire. Banks claim to be overwhelmed with foreclosures, and unable to afford to manage them, including keeping landscaping up, and exterior maintenance. Section 2929.3 gives local governments some teeth to force a lender to maintain the property, or face fines and penalties.
Under the Code, a lenderâ€™s failure to maintain a property includes â€œfailure to care for the exterior of the property, including, but not limited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters from remaining on the property, or failing to take action to prevent mosquito larvae from growing in standing water or other conditions that create a public nuisance.â€ A local government entity (City, Town or County) can give a lender a 30 day notice to correct violations and if it fails to do so, can impose a fine of as much as $1,000 per day. This addition to the code is only applicable to residential properties, and sunsets on January 1, 2013.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firmâ€™s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate brokerâ€™s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.