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  




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                 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  




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              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