Thinning The Herd

By Michael Belote, Esq., California Advocates, Inc.

Because the very raison d’etre for legislators is to solve problems, real or imagined, the rise in defaults and foreclosures has led inevitably to proposed legislative solutions, lots of them. All over the country, but perhaps most significantly in full-time legislature California, legislators have proposed a virtual blizzard of ideas. Included have been proposed foreclosure moratoria, private rights of action to sue lenders, changes in anti-deficiency rules, and more.

UTA’s electronic folder of pending legislation contains nearly four dozen different proposals, but as we enter the final months of the legislative session, most of the bills have fallen by the wayside. Remaining are two major bills addressing loan modifications, one each in the Assembly and Senate, two bills modifying anti-deficiency protection, and a few other miscellaneous bills.

To illustrate the breadth of the ideas presented this year, the following bills are examples of those which were introduced but will not be enacted:

• AB 2024: Would have required a notice by certified mail no more than seven days after rejection of a loan modification request, “specifically stating the reasons why the request was rejected.”
  
  
• AB 2236: Would have required all late notices on loans secured by residential real property to provide contact information for the person with authority to modify the loan.
  
  
• AB 2502: Would have significantly increased the thresholds before nonjudicial foreclosure could be utilized for the enforcement of homeowner’s association assessment liens.
  
  
• AB 2653: Would have required that, upon the transfer of ownership of a mortgage or deed of trust, that the borrower be informed of the price paid for the indebtedness.
  
  
• AB 2678: Would have prohibited foreclosure while the borrower is “in negotiations” to modify the loan.
  
  
• SB 1276: Would have required the trustee or mortgagee to satisfy liens for municipal utilities prior to going to sale on defaulted properties.
  
  
• SB 1427: Originally would have required notices of default to include the name and address of the person responsible for maintaining the property subject to the deed of trust. Later amended to provide a superlien for the costs of nuisance abatement on foreclosed properties. Ultimately the superlien was amended out of the bill.

Of course, for UTA and any other organization involved in the legislative process, the important question at this time of year is which bills might still be enacted. Even as the popular media report nearly every day that foreclosures are declining and loan modifications are increasing, both the Assembly and Senate in California continue to pursue legislation which could significantly impact lenders and trustees.

In the Assembly, most of the action surrounds AB 1639. As currently written, this bill would provide borrowers with the right to request a mandatory mediation program prior to foreclosure, similar to AB 149 in operation in Nevada. Applicable to owner-occupied property subject to a recorded notice of default, the bill would prohibit taking any action with respect to the power of sale until the “Mediated Mortgage Workout” program was completed. The bill is quite prescriptive in terms of the required elements of the “MMW” program, which, like Nevada, would require very considerable resources to administer.

In hearings on AB 1639 in the Assembly, UTA testified at length about the enormous difficulties involved in implementing a Nevada-style mediation law in California. Lender groups are equally opposed. In the Senate, a different concept is being considered in SB 1275. Rather than create a mediation law, SB 1275 basically amounts to an enhanced version of SB 1137, with far more requirements to make borrowers aware of possible opportunities to modify loans. HAMP-participating lenders would be required by state law to conform to HAMP duties, and similar obligations would be placed on non-HAMP lenders. In both cases, failure to comply with the very detailed provisions in the bill would subject lenders and trustees to civil penalties brought by private counsel on behalf of individual borrowers.

UTA and lender groups are strongly opposed to SB 1275 in its present form. As the summer unfolds, lengthy negotiations are likely to determine which concept will move forward, if any. The Governor has not yet indicated whether he believes further action relating to mortgages is necessary, in light of the many bills he has signed on this subject already.

Finally, two bills remain alive on the subject of anti-deficiency protections. The first and less controversial measure is SB 931 (Ducheny). The essence of this bill is that lenders would be prohibited from seeking a deficiency judgment following a short-sale of residential property with four or fewer units, unless the borrower has committed waste or fraud. The far more controversial measure is SB 1178 (Corbett), which would prohibit deficiencies on loan refinances in residential 1-4, including cash-out transactions, if the proceeds of the refinance were used to improve the real property. Lender groups are vociferously opposed to the latter measure.