As a part of the recently passed Budget Package for the State of California, the State Legislature and Governor Schwarzenegger have passed into law an amendment to California Civil Code § 2924 called the “California Foreclosure Prevention Act.” This latest effort to slow the pace of residential foreclosures has been somewhat mis-reported in the news as a 90 day moratorium on foreclosures. This law does not stop foreclosures in the State of California for 90 days. Instead, what the bill, passed on February 20, 2009 and becomes effective on Friday, March 6, 2009, does is add a 90 day “holding” period to the standard timeline for foreclosure of certain mortgages. The bill is only valid until January 1, 2011 unless it is later extended by the State Legislature.
The bill provides that a lender must wait an additional 90 days after the Notice of Default is recorded before they can record and publish a Notice of Trustee’s Sale. This relief is limited to loans that meet the following criteria:
- The Loan must be a first-priority mortgage or first deed-of-trust; and
- The Loan must be secured by the borrower’s primary residence; and
- The Loan must have been recorded between January 1, 2003 and January 1, 2008; and
- The borrower must have occupied the property as their primary residence at the time they became delinquent on the loan; and
- A Notice of Default has been recorded against the property; and
- The Loan cannot be one made, held or serviced by a California State or local housing agency or authority, or cannot be collateral for securities held by one of the foregoing agencies.
The requirement for an additional 90 days does not apply to a mortgage loan servicer who has applied for, and received an exemption from the provisions of this new law. To be eligible for an exemption, the lender must prove to the Commissioner that they have in place a comprehensive program for modification of loans for distressed homeowners. Some of the elements required to be shown include:
- The loan modification program is intended to keep borrowers whose principal residences are homes located in California in those homes when the anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.
- The loan modification program targets a ratio of the borrower’s housing-related debt to the borrower’s gross income of 38 percent or less, on an aggregate basis in the program.
- The loan modification program includes some combination of the following features:
- An interest rate reduction, as needed, for a fixed term of at least five years.
- An extension of the amortization period for the loan term, to no more than 40 years from the original date of the loan.
- Deferral of some portion of the principal amount of the unpaid principal balance until maturity of the loan.
- Reduction of principal.
- Compliance with a federally mandated loan modification program.
- Other factors that the commissioner determines are appropriate. In determining those factors, the commissioner may consider efforts implemented in other jurisdictions that have resulted in a reduction in foreclosures.
- When determining a loan modification solution for a borrower under the loan modification program, the servicer seeks to achieve long-term sustainability for the borrower.
In addition to the exemption available to lenders who prove to the Commissioner that they have a legitimate program for loan modifications in place, the additional 90 days does not apply in the following situations:
- Where the borrower has surrendered the property to the lender or otherwise abandoned it; or
- Where the borrower has contracted with a firm “whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to the mortgagee or beneficiaries;”* or
- Where a proceeding has been filed in Bankruptcy Court, and either the proceeding is not dismissed, closed nor granted relief from stay for the foreclosing creditor.
It is interesting to note that in enacting this new anti-foreclosure law, the State has not removed the previously enacted provisions of California Civil Code § 2923.5 which requires a loan servicer to make an effort to contact the borrower to discuss their options prior to even recording a Notice of Default; that the lender must wait 30 days after making that contact, or satisfying the due diligence requirements for attempting to contact the borrower before proceeding with a foreclosure. We’ll discuss this separate legislation in a future article.
The difficulty with this latest effort to slow foreclosures is that every loan servicer will likely make application for an exemption, and the criteria for obtaining an exemption are not as clearly defined as they should be. Lenders will not likely have a hard time obtaining an exemption from the law. The good news is that the Secretary of Business, Transportation and Housing is required under the law to maintain a website that lists disclosure of what loan servicers have made application for an exemption, and what the disposition of that application was. It also must point the consumer to the loan servicer’s website discussing loan modification options and programs available. Also a positive step is a short sentence inserted into the bill which makes a violation of this new anti-foreclosure law a violation of the loan servicer’s license law, meaning the loan servicer could lose his or her license or be disciplined by their licensing agency for violating the law.
For purposes of this law, persons covered include those licensed by (1) the California Real Estate Commissioner as Real Estate Brokers (and therefore salespersons working under their license), (2) the California Commissioner of Corporations as licensed Residential Mortgage Lenders and Servicers and/or licensed Finance Lenders and Brokers, and (3) the Commissioner of Financial Institutions for Commercial and Industrial Banks, Savings Associations and Credit Unions who service mortgage loans.
Click Above To See A Full-Sized Version of the Foreclosure Timeline.
For more information about foreclosure, foreclosure prevention, bankruptcy and other options, please feel free to call us at (949) 492-3350.
**UPDATE** – As anticipated, this piece of legislation turned out to be nothing more than a piece of swiss cheese. On June 15, 2009, the date on which the legislation actually became effective, magically almost 47 mortgage lenders, servicers and others involved in foreclosure received a temporary exemption from the law. Amazing, considering the fact that the State had posted on its website that the applications would not even be accepted until June 15, 2009. In some instances, not only did the firms receive a temporary exemption, many, such as Bank of America, Citimortgage, EMC Mortgage, Kondur Capital and Select Portfolio Servicing all received their exemptions WITHIN 24 HOURS OF ENACTMENT OF THE LAW. I am appalled at our legislators who, under the guise of protecting homeowners from foreclosure, wasted our time and taxpayer money to enact a law that is absolutely meaningless. Of the largest loan servicing companies in California (the ones who are foreclosing on 90%+ of homes in California), all are now 100% exempt from this new law. Here is a link to the current list of exempt lenders as of July 2, 2009 – be sure to check the Department of Corporations, Department of Real Estate and Department of Financial Institutions websites, all of which can be linked from the above website.
Someone in the State Legislature PLEASE tell me how it makes sense to add 90 days to the foreclosure process to allow people to negotiate a modification or some other relief from foreclosure, AND THEN EXEMPT FROM HAVING TO WAIT THAT ADDITIONAL 90 DAYS THE VERY BANKS THESE HOMEOWNERS ARE TO NEGOTIATE WITH? Way to go California – financially, and now MORALLY bankrupt.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’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 broker’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.
*This particular provision of the new law is very troublesome. Its clear that the intention is to not provide the benefit of the additional 90 days in foreclosure to people simply trying to drag-out a foreclosure, however, does someone who retains a bankruptcy attorney to file bankruptcy, which will delay the foreclosure, or someone who hires an attorney to process a loan modification trigger this exception to the rule? It will be interesting to see how this all settles out in the courts.