BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 2347 (Feuer) Hearing Date: June 16, 2010 As Amended: May 28, 2010 Fiscal: No Urgency: No VOTES: Asm. Floor(06/01/10)50-25/Pass Asm. B. & P. (05/03/10)08-01/Pass Asm. Appr. (04/27/10)07-02/Pass SUMMARY Would authorize local entities to postpone nonjudicial foreclosures for up to 60 days, on certain multifamily properties in which they hold ownership interests. DIGEST Existing law 1. Prescribes rules that govern the nonjudicial foreclosure process in California (Civil Code Section 2924 et seq.). A layman's description of the portions of the process that are relevant to this bill follows immediately below. a. The nonjudicial foreclosure process begins with the recordation of a notice of default (NOD) by a mortgagee, trustee, beneficiary, or authorized agent. The NOD must be recorded in the county in which the property securing the defaulted loan is located, and must be mailed to specified persons with a financial interest in the property, including the property owner. Existing law does not prescribe the minimum amount of time that must pass between a delinquency and the recordation of a NOD, although NODs are commonly recorded only after a borrower is at least 90 days delinquent on his or her mortgage loan; b. At least three months must pass after recordation of a NOD, before the mortgagee, trustee, beneficiary, or authorized agent may record a notice of sale. Notices of sale must be recorded in the county in which the property securing the defaulted loan is located, mailed to the AB 2347 (Feuer), Page 2 property owner and other specified persons with a financial interest in the property, published in a newspaper of general circulation, and posted on the property that is the subject of the sale; c. At least 20 days must pass after recordation of a notice of sale, before a property may be sold. However, sale dates may be, and often are, postponed. Under existing law, a sale date may be postponed for any of the following reasons: 1) upon the order of any court of competent jurisdiction; 2) if stayed by operation of law; 3) by mutual agreement, whether oral or in writing, of any trustor and any beneficiary or any mortgagor and any mortgagee (i.e., by mutual agreement between a borrower and his or her lender); and/or 4) at the discretion of the trustee. A new notice of sale must be recorded, if a postponement or postponements delay the sale for more than 365 days following the first scheduled sale date. This bill 1. Would change the nonjudicial foreclosure process for properties that contain five or more multifamily units, when a public entity is a party to a regulatory agreement or a recorded deed restriction on the property, as follows: a. The public entity could postpone the trustee sale date by up to 60 days, through written notice to the trustee, as specified; b. Power to postpone a trustee sale could be exercised only once; c. Power to postpone a trustee sale could be exercised by only a single public entity, if two or more public entities were parties to regulatory agreements or recorded deed restrictions on the same property; 2. Would define a public entity, for purposes of the bill, as a city, county, city and county, redevelopment agency, or any political subdivision of one of these entities; 3. Would define a "recorded deed restriction," for purposes of the bill, as a deed recorded as an encumbrance against title to the property, which restricts all or a portion of the property's usage to rental to lower income households, and AB 2347 (Feuer), Page 3 identifies the number of units restricted for this use; 4. Would define a "regulatory agreement," for purposes of the bill, as a recorded agreement with a public entity that has provided financing for the acquisition, rehabilitation, construction, development, or operation of a low-income housing property, and which specifies the number of units restricted for this use. COMMENTS 1. Purpose of the bill To help local entities protect their investments in affordable rental housing that is threatened by foreclosure, by giving these local entities up to 60 extra days in which to decide whether to protect their property interests. 2. Background In some jurisdictions, public agencies (typically city or county housing departments) provide financial assistance in connection with multi-family properties, to ensure that a portion of these properties is set aside as rental housing for lower-income tenants. Public agencies seldom hold the senior mortgage or deed of trust; instead, they subordinate their property interests, and hold junior liens. When a multifamily property enters the foreclosure process through recordation of a NOD, the courts typically appoint a receiver to evaluate and report on the property's operations, financial condition, and physical condition. These reports usually take at least 60 days to prepare, and are used by public entities that hold subordinated liens, to help these entities fully evaluate the often complex financial details of a housing development. With the information in the receiver's report, the public entity can weigh the costs and benefits of stepping in to preserve the affordable housing units against the costs and benefits of relinquishing its ownership interests following a foreclosure sale. When this bill was first introduced, much of the debate surrounding the bill centered around these receivers' reports, the amount of time they took to prepare, and the amount of time that local governments needed to evaluate the information they contained. Many understood the goal of the bill as giving public entities enough time to receive and AB 2347 (Feuer), Page 4 evaluate these reports, before a foreclosure sale could occur. However, as debate on this bill has evolved, it has become apparent that the time involved in preparing and analyzing these reports is only part of the reason local governments are seeking to add an extra 60 days to the foreclosure timeline. The other reason relates to these governments' limited fiscal resources. Most local governments lack sufficient staff to evaluate whether to act, and how to act, on every delinquent property in which they hold an ownership interest with a low-income housing deed restriction. If a delinquent borrower is going to be able to cure his or her default or work out a forbearance arrangement or loan modification with the senior lienholder, the local government can avoid expending staff resources on evaluating what action(s) to take and assembling the financial resources necessary to follow through on its action plan. Because of these staff and resource limitations, most local entities will only focus on a property, if it appears very likely that the property will be sold at a foreclosure sale. The proponents of this bill view the recordation of a notice of sale as the sign that a foreclosure sale will occur. For that reason, they are proposing to authorize local entities to postpone sales for up to 60 days, after a notice of sale is recorded. These extra two months are intended to allow the local governments time in which to evaluate what action(s) to take and calculate how much they are willing to spend, and to seek approval from their governing bodies to implement their action plan. The opponents of this measure are concerned about adding an extra 60 days to a foreclosure timeline that has already become extremely long. Although a foreclosure sale may legally be conducted three months and 21 days after the recordation of a NOD, the average length of time between NOD and trustee sale has been hovering at about 230 days during 2010. The opponents are sympathetic to local governments' desire for time to protect affordable housing, but would like to see that time be folded into the existing, lengthy foreclosure timeline, rather than added on top of it. 3. Support . The Office of Los Angeles Mayor Antonio AB 2347 (Feuer), Page 5 Villaraigosa is sponsoring this bill, in response to its experiences with multifamily housing delinquencies. During the last three years, 22 separate loans for multifamily developments in the City of Los Angeles' portfolio were threatened with foreclosure. Those developments included 286 low-income housing units. According to the author's office, local legislative bodies must meet, in order to review and approve the plan of action recommended by their housing agency. Because local housing agencies are responsible for prudently managing limited public finances, and are constrained by limited human resources, they typically do not begin to act upon a receiver's report in detail, or begin to seek council or board approval to acquire a property, until a notice of sale is issued for a property. Because a sale date can occur as early as 21 days after a notice of sale is recorded, local agencies can encounter trouble getting their plans of action approved by their governing bodies before a foreclosure sale occurs. The Western Center on Law and Poverty and California Rural Legal Assistance Foundation explain that, when the holder of the first lien forecloses, all subordinate interests are wiped out. Thus, public dollars that were used for the public purpose of providing affordable rental housing assistance are lost, and the low-income tenants are displaced. In a few situations, lenders that hold senior liens have been willing to work with public agencies that hold subordinate liens, to delay the foreclosure sale, while the public agency determines the most prudent course of action (which, in some cases, may be to pay off the senior lienholder and acquire the property). However, in other cases, lenders move rapidly to foreclose, and affordable rental housing is lost. Both the Western Center on Law and Poverty and the California Rural Legal Assistance Foundation believe that AB 2347 will create a simple, but important mechanism to preserve public investments and affordable housing. With the extra 60 days this bill would authorize, a public entity will have the time to determine whether to step in and preserve the affordable housing units. If the public entity decides that it wishes to take action, the extra 60 days will give that entity the time it needs to bring its proposal to the local legislative body for approval. The League of California Cities notes that cities face many challenges in meeting affordable housing goals under the Regional Housing Needs Assessment process, and that funding AB 2347 (Feuer), Page 6 for affordable housing is limited. The League believes that AB 2347 will serve as a tool to keep foreclosed housing units affordable. 4. Opposition A coalition of financial institutions, including the California Bankers Association, California Financial Services Association, California Independent Bankers, and California Mortgage Bankers Association, is opposed to the bill, unless it is amended. The coalition notes that it has opposed previous measures to extend the statutory foreclosure timeline, but understands the importance of preserving local funds used to finance affordable housing units and the desire to ensure that those units are not depleted, as the result of a foreclosure sale. Industry's preferred amendments would give local governments the ability to request an additional sixty days between the NOD and the notice of sale, over and above the statutory minimum of three months, but would not authorize a 60-day postponement, if at least three months plus sixty days had already passed, between the NOD and the notice of sale. Industry's proposed amendments would also require local governments to give the mortgagee, beneficiary, trustee, or authorized agent notice about the possibility of a postponement, within three months following the recordation of a NOD. Finally, industry proposes a sunset date of January 1, 2013, which aligns with the sunset dates included in other enacted foreclosure-related legislation. The California Land Title Association (CLTA) believes that the 60-day delay authorized by the bill will have a chilling effect on the availability of multi-family housing in California. Persons will be wary of investing in multifamily housing, if such an investment has a higher risk associated with it. An investor purchasing one of these multi-family properties may suffer unintended monetary losses, because they did not anticipate the additional 60-day delay. CLTA observes that, if receivers are slow to produce their reports, then that process needs to be improved at the local level or addressed through additional obligations placed on receivers. "If the goal is to increase available affordable housing of this kind, does it make sense to increase the risk associated with such an investment? Shouldn't the legislation target requiring receivers to provide more timely notice to local agencies?" AB 2347 (Feuer), Page 7 5. Questions a. Will allowing local entities to add 60 days to the foreclosure process, after a notice of sale is recorded, have the unintended effect of encouraging lenders to file notices of sale earlier than they otherwise would have? b. Should the Legislature set a precedent, by allowing an entity other than the foreclosing beneficiary, the trustee, or a court to postpone a nonjudicial foreclosure sale? c. Should a local entity that requests a postponement pursuant to the authority provided by this bill have to do anything, as a condition of extending the foreclosure process by an extra 60 days? Will requiring some sort of affirmative action by local governments who request a postponement minimize the possibility that local governments will automatically request postponements, just because they can? 6. Suggested Amendments a. Bankruptcy filings are common among property owners who are facing an imminent foreclosure sale. This bill is silent on how its time periods interact with a bankruptcy filing. Amendments are suggested to clarify this interaction in a way that does not further lengthen the nonjudicial foreclosure process; b. Nearly all of the foreclosure-related bills enacted by the Legislature since 2008 have contained sunset dates, because they are temporary fixes, which will no longer be needed once California's housing market recovers. A sunset date of January 1, 2013 is suggested for this measure, consistent with other recently-enacted, foreclosure-related legislation; c. As noted above, the primary outstanding disagreement between the author/sponsor and the opponents of this bill relates to when in the foreclosure process a local entity may exercise its postponement authority, and how long that postponement AB 2347 (Feuer), Page 8 may push out a foreclosure. The opposition has previously suggested the concept of a 150-day "wall." Under this concept, any delay in the foreclosure process that occurs based on a public entity's exercise of the authority granted by the bill would expire once 150 days elapses from filing the NOD. Local entities could use their authority to postpone a foreclosure, but could not postpone the filing of a notice of sale beyond 150 days from the NOD. Although the specifics of this proposal were rejected by the sponsor as providing them with too little time in which to develop a plan of action, the concept of a time-specific "wall" was not out-and-out rejected. This concept has an advantage over the post-notice of sale postponement proposal currently contained in the bill, because it does not incentivize beneficiaries to accelerate the filing of a notice of sale. The current wording of the bill does incentivize that action. In an effort to find a compromise that is acceptable to all parties, staff suggests a 180-day wall, which builds off the concept suggested by the opponents, but gives local governments more time in which to develop a plan of action, and does so without incentivizing beneficiaries to file a notice of sale, as soon as they are legally able to do so. If this compromise is acceptable, staff further recommends that the language on page 6, lines 27 through 35 be deleted, as it will no longer be necessary. Page 6, line 19, should also be amended to clarify that written notice to a trustee must be made through certified or registered mail, guaranteed or overnight delivery service, or personal delivery. POSITIONS Support Office of Mayor Antonio Villaraigosa (sponsor) Western Center on Law and Poverty California Rural Legal Assistance Foundation League of California Cities AB 2347 (Feuer), Page 9 Oppose California Land Title Association First American Corporation California Bankers Association California Financial Services Association California Independent Bankers California Mortgage Bankers Association Consultant: Eileen Newhall (916) 651-4102