Like litigation, real estate deals, or nonjudicial foreclosures for that matter, the world of legislation moves from a series of deadlines to deadlines. For the California legislature, the 2008 legislative year is entering the final three months, and a host of bills affecting mortgages and foreclosures are hanging in the balance. Policymakers are determined to do something about subprime mortgages and the rise in defaults and foreclosures, and we will soon have a view of the endgame.

The most far-reaching bill in this area, and probably the one most likely to be enacted, is SB 1137 (Perata). Various real estate groups, including UTA, worked for months on the language of the bill, which has as its centerpiece a requirement that lenders make diligent attempts to contact borrowers prior to recording notices of default. UTA worked to make sure that the trustee role in the foreclosure process was more accurately reflected in the bill, and that duties do not fall to trustees that more properly belong to others. With all organized real estate opposition to the bill removed, SB 1137 passed the Senate on a narrow, largely party-line vote of 28-10, with Democrats in support and Republicans opposed.

Moving over to the Assembly, SB 1137 received another party-line vote in the Banking and Finance Committee, and will move to the Assembly floor for a vote in the next few weeks. At the same time, however, a series of mortgage bills are moving over to the Senate from the Assembly, where their fate is uncertain. In other words, the various bills must not only navigate the waters between Democrats and Republicans, but also between the Senate and Assembly. Beyond that, Governor Schwarzenegger will have the ultimate say in signing or vetoing bills which reach his desk. So, even though the legislative year is quite far along in California, the outcome in the mortgage and default arena is highly uncertain.

At this point, what is known is this:  SB 1137 proposes to add a requirement to contact borrowers on owner-occupied residential mortgages at least 30 days prior to NOD.  Special transition rules will apply to NODs already of record when the bill becomes effective. The contact obligation will become operative 60 days after the effective date of the bill. Additional provisions of the bill require posting and mailing notices to potential tenants, who will be provided with a uniform 60 days after the trustees sale before eviction. The bill also imposes a state requirement on owners to maintain properties after foreclosure, with very significant penalties for noncompliance.

While the Assembly will be acting on SB 1137, the Senate will consider a number of bills relating to mortgage products and servicing. AB 1830 (Lieu), for example, would create extensive new limitations on nontraditional, subprime, and high-cost mortgages. The bill addresses issues such as prepayment penalties, balloon payments, yield spread premiums, ability to repay, and others. Another bill, AB 2359 (Jones), would eliminate holder in due course protections for high-cost mortgages, and yet another, AB 2740 (Brownley), would enact very extensive new Civil Code provisions on loan servicing.

While the real estate community in general has “gone neutral” on SB 1137, most groups remain strongly opposed to the Assembly bills mentioned above. The contention is that the availability of mortgage capital in California will be very significantly disadvantaged if these bills become law. But the leadership in the Assembly is just as strong in pushing for these changes as Senator Perata is in advocating for SB 1137.

Finally, making the whole situation a real Rubik’s Cube is the overlay of potential changes at the federal level to Regulation Z. If various bills are enacted in California, and Reg Z changes become effective, lenders and servicers will have to figure out which changes apply to whom.

With SB 1137 looming, UTA is poised to report promptly to members when and if the bill becomes operative. Stay tuned!

For previous articles by Michael Belote, click here.