New Laws Regarding California Foreclosures

New Laws Regarding California Foreclosures - a summary

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By Catherine Schlomann Robertson
Pahl & McCay
225 West Santa Clara Street
Suite 1500
San Jose, California 95113
408/286-5100 (phone); 408/286-5722 (fax)
crobertson@pahl-mccay.com


Please understand that the information discussed in this Article is general in nature and is not intended to be legal advice. It is intended to assist owners and managers in understanding this issue area, but it may not apply to the specific fact circumstances or business situations of all owners and managers. You may need to consult applicable state and local laws. For specific legal advice, consult your attorney.

On July 8, 2008, Governor Schwarzenegger signed SB 1137 which adds new procedural steps that a lender must follow in California before conducting a non-judicial foreclosure sale under a deed of trust covering the principal residence of any person, both consumer or commercial loans.

As stated in the bill “California, as well as the nation, is facing anunprecedented threat to the economy and housing market due to increasing numbers of foreclosures caused by mortgagepayment defaults.  In 2007, more than 254,000 California households defaulted on their loans, and a total of more than 84,000 homes were lost to foreclosure.  The United States Conference of Mayors reports that California cities may see a four billion dollar decline in property, sales,  and transfer taxes as a result of the present housing crisis.”

Certain provisions of SB 1137 become operative immediately, and certain become effective September 6, 2008.  The law remains in effect through January 1, 2013.

Contacting Borrower Prior to Filing Notice of Default
SB 1137 adds additional procedural steps that a mortgagee, trustee, beneficiary, or authorized agent must follow before For loans made from January 1, 2003 to December 31, 2007, inclusive, that are secured by residential real property and are owner-occupied residences, at least 30 days prior to filing the notice of default, a mortgagee, trustee, beneficiary, or authorized agent must either
make contact with the borrower or satisfy other due diligence requirements set forth in SB 1137.
Contact with the borrower must be in person or by telephone “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.” The borrower must be advised that he or she has the right to request a subsequent meeting, and if requested, the meeting must be scheduled to occur within 14 days. Whether the assessment of the borrower’s financial situation occurs during the first contact, or at the subsequent meeting, the borrower must be provided with the toll-free telephone number made available by the United States Department of Housing and Urban Development to find a HUD-certified housing counseling agency.

The notice of default may be filed without actual “contact”, if there has been “due diligence” of the mortgagee, beneficiary or authorized agent. Satisfaction of “due diligence” requires all of the following:  (1) a first-class letter that includes a toll-free numberfor HUD-certified housing counseling agencies; (2) after the letter has been sent, at least three phone calls atdifferent hours and on different days (an automated system may be used to dial borrowers); and (3) if there is no response within two weeks of the required phone calls, a certified letter, return receipt requested, must be sent.  Due diligence would also require that themortgagee, trustee, beneficiary, or authorized agent setup a toll-free number that provides access to a live representative during business hours, and to post a prominent link on its homepage, if any, to the following information: (1) options that may be available to the borrowers who are unable to afford their mortgage payments and who wish to avoid foreclosure; (2) a list of financial documents the borrower should collect in order to discuss those options; (3) a toll-free number for borrowers who wish to discuss those options with the mortgagee, trustee, beneficiary, or authorized agent; and (4) a toll-free number for HUD-certified housing counseling agencies.

New Requirements for Notices of Default
SB 1137 provides that the notice of default must include a declaration from the mortgagee, beneficiary, or authorized agent that it has contacted the borrower, that it has tried with due diligence to contact the borrower, or that the borrower has surrendered the property.
If a mortgagee, trustee, beneficiary, or authorized agent had already filed a notice of default prior to the enactment of SB 1137,2 and did not subsequently file a notice of rescission, then a notice of sale filed pursuant to Section 2924f (1) must include a declaration that the borrower was contacted “to assess the borrower’s financial situation and to explore options for the borrower to avoid foreclosure” or, (2) in the event no contact was made, must list the efforts made to contact the borrower.

New Requirements for Notices of Sale
SB 1137 requires, where the residential billing address is difference than the property address, that the foreclosing entity, at the time of posting a Notice of Sale, to mail a form notice
addressed to "resident" that informs any tenant on the property that the foreclosure process has begun on theirrental property.  The outside of the envelope containing the notice will prominently state: "IMPORTANT:  Information contained in this letter may affect yourright to live in this property."  This billwould require the notice and text on the envelope to be in English,  Spanish, Chinese, Tagalog, Vietnamese, or Korean (Englishplus the five languages described in Civil Code Section 1632).

Tenant or Subtenant in Possession of a Rental Housing Unit
SB 1137 provides that a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure must be given 60 days’ written notice to quit before the tenant or subtenant may be removed from the property.

Adequate Upkeep of Real Property
SB 1137 requires legal owners to maintain vacantforeclosed residential properties. Governmental entities are allowed to impose civil fines and penalties of up to $1,000 per day forviolations, after the legal owner has received a notice of the claimed violation, includinga description of the conditions giving rise to the claim,  and opportunity to remedy the violation at least 14 days prior to imposing those fines and penalties.  "Failure to maintain" would include failure to adequately care for the property, including, but notlimited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters fromremaining on the property, and failing to take action toprevent growth of mosquito larva in standing water.

Validity of Servicer Loan Modifications
Finally, SB 1137 also recognizes the concerns that loan servicers have expressed that they may lack authority in modifying real estate secured loans, by stating that a servicer is deemed to act in the best interests of all parties in agreeing to loan modification or workout plan if: (1) the loan is in payment default, or payment default is reasonably foreseeable; (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis, and (3) so long as the loan modification or workout plan is consistent with the servicer’s contractual authority.

This is a brief summary of the provisions of SB 1137, not a detailed analysis, and you should feel free to contact us for specific questions or dates of effectiveness of SB 1137.