BILL ANALYSIS Ó
AB 935
Page 1
Date of Hearing: April 25, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 935 (Blumenfield) - As Amended: April 14, 2011
SUBJECT : Foreclosures: foreclosure mitigation charges
SUMMARY : Would prohibit a notice of trustee's sale from being
accepted for filing with a county recorder until the mortgage
servicer pays a foreclosure mitigation charge of $20,000.
Specifically, this bill :
1)Requires the county recorder to forward the moneys to the
Treasurer for deposit into the Foreclosure Mitigation Fund
(FMF).
2)States that cost of the foreclosure charge may not be passed
on to borrowers.
3)Provides that if the foreclosure sale is rescinded, then the
county recorder shall return the moneys to the mortgage
servicer except any interest that may have been earned while
the moneys were held in trust.
4)Requires the moneys to be distributed to local agencies in the
following way:
a) Twenty percent for K-12 and community college purposes;
b) Twenty percent for public safety purposes;
c) Twenty percent for redevelopment activities;
d) Twenty percent for mitigating the effects of
foreclosures on the community, including, but not limited
to, reimbursement of county recorder's costs in collecting
the charge.
e) Twenty percent for loans for small business within the
jurisdiction of the local agency.
5)Exempts from the requirements, a mortgage servicer that is
servicing a loan for a mortgage lender with assets below ten
billion dollars.
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6)Exempts a mortgage loan servicer from paying the foreclosure
fee for loans owned by any local or state government agency.
7)States it is the intent of this section to recoup some of the
foreclosure costs currently being borne by the taxpayers of
this state.
EXISTING LAW
1)Regulates the non-judicial foreclosure process pursuant to the
power of sale contained within a mortgage contract, and
provides that in order to commence the process, a trustee,
mortgagee, or beneficiary must record a notice of default
(NOD) and allow three months to lapse before setting a notice
of sale for the property. ÝCivil Code Section 2924, all
further references are to the Civil Code].
2)Provides that the mortgagee, trustee or other person
authorized to make the sale must give notice of sale, and
requires notice of the sale to be made, as specified, at least
20 days prior to the date of sale. ÝSection 2924f].
3)Provides that a mortgage, trustee, beneficiary, or authorized
agent may not file a NOD until 30 days after contact has been
made with the borrower who is in default. ÝSection 2923.5a1].
4)Requires the mortgagee, trustee, beneficiary or authorized
agent to contact a borrower in default in person or by
telephone and inform them of their right to a subsequent
meeting, and telephone number of the HUD to find a HUD-
certified housing counselor. ÝSection 2923.5a2].
5)Allows a borrower to assign a HUD-certified counselor,
attorney or other advisor to discuss with the entities options
for the borrower to avoid foreclosure. ÝSection 2923f].
6)Provides that a NOD may be filed when the mortgagee, trustee,
beneficiary or authorized agent has not contacted the borrower
provided that the failure to contact the borrower occurred
despite reasonable due diligence on the part of the entity and
that "due diligence" means and requires the following:
a) The mortgagee, trustee, beneficiary or authorized agent
sends a first class letter that includes the toll-free
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number available for the borrower to find a HUD-certified
housing counseling agency; and,
b) Subsequent to the sending of the letter the mortgagee,
trustee, beneficiary or authorized agent attempts to
contact the borrower by telephone at least three times at
different hours and on different days. ÝSection 2923g].
7)Requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a toll-free number for borrowers that will
provide access to a live representative during business hours
and requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a link on the main page of its Internet Web
site containing the following information:
a) Options that may be available to borrowers who are
unable to afford their mortgage payments and who wish to
avoid foreclose, and instructions to borrowers advising
them on steps to take to explore these options; and,
b) A list of documents borrowers should collect and be
prepared to submit when discussing options to avoid
foreclosure. ÝSection 2923g (5)].
8)Specifies that the notice and contact requirements do not
apply in the following circumstances:
a) The borrower has surrendered the property as evidenced
via a letter or delivery of keys to the property to the
mortgagee, trustee, beneficiary or authorized agent ;
b) The borrower has contacted a person or organization
whose primary business is advising people who have decided
to leave their homes on how to extend the foreclosure
process and avoid the contractual obligations; or,
c) The borrower has filed for bankruptcy. ÝSection 2923h].
9)Makes a legislative findings and declarations that a loan
servicer acts in the best interest of all parties if it agrees
to, or implements a loan modification or workout plan in one
of the following circumstances:
a) The loan is in payment default, or payment default is
reasonably foreseeable; or,
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b) Anticipated recovery under the loan modification or
workout plan exceeds the anticipated recovery through
foreclosure on a net present value basis. ÝSection 2923.6].
10)Provides that a notice of sale may not be given for 90 days
in order for parties to pursue a loan modification. ÝSection
2923.52].
11)Specifies that a servicer can get an exemption from the
90-day foreclosure moratorium if they demonstrate proof of a
comprehensive modification program. ÝSection 2923.53]
12)Requires that upon posting of a notice of sale, the
mortgagee, trustee, beneficiary or authorized agent shall mail
to the borrower a notice in English and Spanish, Chinese,
Tagalog, Vietnamese, or Korean that states:
"Foreclosure process has begun on this property, which
may affect your right to continue to live in this
property. Twenty days or more after the date of this
notice, this property may be sold at foreclosure. If you
are renting this property, the new property owner may
either give you a new lease or rental agreement or
provide you with a 60-day eviction notice. However,
other laws may prohibit an eviction in this circumstance
or provide you with a longer notice before eviction. You
may wish to contact a lawyer or your local legal aid or
housing counseling agency to discuss any rights you may
have." ÝSection 2924.8].
13)Provides that a notice of sale postponement may occur at any
time prior to the completion of a sale for any period of time
not to exceed a total of 365 days from the date set in the
notice of sale. ÝSection 2924g]
14)Specifies that if sale proceedings are postponed for a period
totaling more than 365 days, the scheduling of any further
proceedings shall be preceded by giving a new notice of sale.
ÝSection 2924g]
FISCAL EFFECT : Unknown
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COMMENTS :
Background:
The background of the current economic recession is well
documented, and its effects, through the foreclosure crisis are
easily demonstrated. The Banking and Finance Committee, as well
as, other committees have conducted numerous hearings examining
the foreclosure issue from multiple angles. According to
ForeclosureRadar.com thus far in 2011, in California 74,581 NOD
and 74, 914 notice of trustee sales (NOT) have been filed.
Furthermore, of the loans defaulting the majority tend have
outstanding balances between 200-500K. Loans with vintages from
2005-2007 are those still at most risk of foreclosure, though
the types of loans defaulting have changed. While many loans
still exists of a subprime or non-traditional variety, the last
year and a half has seen an increase in defaults on traditional
fixed rate loans. Much of the strain in the prime-market, is a
result of the greater economic downturn, specifically a
double-digit unemployment rate.
Costs of Foreclosure .
The idea behind this bill is that foreclosures create
unmitigated costs to local governments and society as a whole,
and that mortgage loan servicers should pay for those costs
because of a perceived, or real, lack of effort on the part of
mortgage loan servicers to modify loans to sustainable levels.
What are the costs of foreclosures to California communities?
Generally, one can easily guess at the broader unspecific costs
of foreclosure. Likely, a home in foreclosure also equals a
homeowner that is not spending money in the local economy, and
may be delinquent in paying for local government fees and
assessments.
Foreclosure costs are not just born by communities. Mortgage
servicers and lenders also face substantial foreclosure losses.
An April 2007 report by the Congressional Joint Economic
Committee, "Sheltering Neighborhoods from the Subprime
Foreclosure Storm" broke down the costs of foreclosure on
various entities involved in the process:
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Homeowner: $7,200
Lender: $50,000
Local government: $19,227
Impact on neighbor's home value: $1,508
Estimated total cost of foreclosure: $77,935
The study, The Municipal Costs of Foreclosures: A Chicago Case
Study, Apgar & Duda, February 27, 2005 (Available at
http://www.995hope.org/content/pdf/Apgar_Duda_Study_Full_Version.
pdf )
is the most substantial analysis of municipal foreclosure costs
available. This study found that depending on the nature of the
foreclosure and the disposition of the property, the municipal
costs can range from $27 to almost $35,000. Further costs
pressures resulting from foreclosures have been covered in The
External Costs of Foreclosure: The Impact of single-Family
Mortgage Foreclosures on Property Values, Dan Immergluck and
Geoff Smith 2006. (Available at
http://www.findaforeclosurecounselor.org/network/neighborworksPro
gs/foreclosuresolutions/pdf_docs/hpd_4closehsgprice.pdf ). This
study found that for every foreclosure within an eighth of mile
of a home, results in a .9% decrease in the value of that
property. Both studies outline the local government costs, as
well as, the costs of foreclosure to public safety and
educational institutions. However, these studies do not analyze
California so the costs could be more or less. Furthermore, in
the Chicago case study, the state of Illinois utilizes a
judicial foreclosure system, whereas California generally uses
nonjudicial foreclosure for residential property. Judicial
foreclosure is typically more expensive.
Arguments in support.
A coalition of supporters writes in support (Following quotes
are taken from multiple letters):
Between 2009 and 2012, it is projected that almost two
million California homes will suffer foreclosure. This
crisis not only affects those who lose their homes, but our
communities as a whole. Neighbors suffer from reduced
property values; local governments lose property tax
income; school enrollment declines and law enforcement sees
increased calls and violent crimes?
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?AB 935 addresses this problem by requiring mortgage
servicers to pay a $20,000 community reimbursement charge
before foreclosing on a home. This charge goes entirely to
local communities in order to offset the costs borne by our
neighborhoods because of foreclosures. The monies are
divided evenly between public safety, public education,
local governments, redevelopment activities and small
businesses. This bill will inject much needed funds into
our neighborhoods and help to reverse the effects of the
housing crisis?
?The state needs to have a bold policy to address the costs
of foreclosures. Right now, California taxpayers are
bearing the full expense of the foreclosure mess. Banks
must be part of the solution to the problem they helped
create.
The foreclosure fee (AB 935) addresses the costs of
foreclosures by requiring mortgage servicers to pay just a
portion of the costs with a $20,000 community reimbursement
fee before foreclosing on a home.
AB 935 provides an added financial incentive for mortgage
servicers to modify loans as an alternative to foreclosure.
However, if the servicer proceeds with a foreclosure, they
pay the fee. Over the next two year, a foreclosure fee
would generate an estimated $12 billion. The revenue would
go entirely to local communities in order offset the
multiple costs borne by our neighborhoods because of
foreclosures. The revenue is shared evenly between public
safety, public education, local governments, redevelopment
activities, and small businesses. This solution would
inject desperately needed funds into our neighborhoods
struggling to recover from foreclosures and its impacts.
California cannot afford to sit by and let bank
foreclosures sap their communities and drain billions from
public budgets. Mortgage servicers have been slow to modify
home loans and need to pay their fair share of costs to
restore communities.
Arguments in opposition.
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A coalition of opponents write:
The TAX imposed by this measure will be passed on to either
new borrowers purchasing residential property and/or will
be paid by the actual holder of the mortgage note. The
proposed TAX will further increase the costs associated
with purchasing a home. This is particularly alarming
given that interest rates are likely to rise, down payments
are increasing, conforming loan limits are likely to be
reduced and there is little private, secondary market
capital interest in real estate lending?
Collectively, the government sponsored entities known as
Fannie Mae and Freddie Mac, the Federal Housing
Administration and the Veterans Affairs own or guarantee
the majority of mortgage debt and they have recently been
responsible for financing nearly 90 percent of all new
loans. In most cases, the TAX proposed under this measure
is payable by the federal government and therefore the
taxpayers. Given that taxpayers already subsidize the
federal government's involvement in mortgage lending, this
will result in double taxation?
?While saddling other entities with this substantial new
TAX, the measure does absolutely nothing to improve the
borrower's underlying financial condition. For those
unable to pay and where there are no other foreclosure
avoidance solutions available to that borrower, foreclosure
must still proceed, notwithstanding the TAX. In fact, if
the author were successful at delaying or disincentivizing
foreclosures, the result would be to exacerbate the very
problem the author is purportedly attempting to fix.
Delays in the foreclosure process undoubtedly will reduce
income to local government from unpaid taxes, will
encourage blight and will forestall economic recovery?
Issues and questions for discussion.
This bill raises many questions and policy issues that require
careful consideration. While, attempting to help homeowners is
a laudable goal, the law of unintended consequences needs to be
considered in the context of broader impacts and unanswered
questions.
1)In support of this bill proponents have outlined the revenue
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that this foreclosure charge could bring in to the state to
mitigate foreclosure costs to state and local government. At
the same time, proponents have also pointed out that the fee
is also designed to prevent foreclosure by forcing servicers
to pay such a large monetary price to foreclose that they will
be more likely to engage in loan modifications. This would
appear to be conflicting goals, as either this is meant to
generate revenue or prevent foreclosure, but not both. If
foreclosures slow down or stop, then this proposal will not
generate revenue.
2)This would apply to primary and non-primary residences. A
servicer would be required to pay a fee under this bill,
irrespective of whether the home is a vacation or rental
property.
3)A mortgage loan servicer would have to pay the fee even in
those cases where a borrower strategically defaults, or is
simply unable to afford the mortgage even under more favorable
terms and conditions. In the first case, the servicer faces
the issue of a borrower who can otherwise afford a property,
but determines due to negative equity considerations, that
they should walk away from the property. In the second case,
you may have a borrower that even under the conditions of a
loan modification, still may not be able to afford the loan
and the home goes into foreclosure. In both cases, the
servicer would be required to pay the 20,000 to file the sale
notice. Additionally, if the premise is true, that the fee
will encourage modifications, at what point should one judge
that sufficient modification offers and attempts have been
made? Does it matter that a servicer may have attempted
modification? Under this bill, no matter how many offers of
modification have been made, or even if the borrower defaults
on an existing modification (re-default), the servicer would
still have to pay the fee.
4)The costs of mortgage loan servicing are assumed by the holder
of the loan, or in some cases by the borrower (late payment
fees, etc). Mortgage loan servicers operate under various
models. Some servicers only do mortgage loan servicing for
the owners of the loan, and others are the servicing entities
of large or small financial institutions that may service for
their own portfolio, or service mortgages for other entities,
such as secondary market participates. The costs associated
with foreclosure are passed on ultimately to the owner of the
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loan. Fannie Mae, Freddie Mac and Ginnie Mae are the major
secondary market purchasers of mortgages and hold 80% of the
outstanding principle of mortgages that are serviced by
commercial banks in their capacity as servicers. (For an
explanation of these entities and their role in the mortgage
market, staff suggest reading Fannie Mae and Freddie Mac at
Work in the Secondary Mortgage Market, by Michael Padhi,
senior economic analyst Federal Reserve Bank of Atlanta,
accessible at
http://www.frbatlanta.org/pubs/financialupdate/financial_update
-vol_14_no_1-fannie_mae_and_freddie_mac.cfm?redirected=true )
Under the Troubled Asset Relief Program (TARP), Fannie and
Freddie have already received an infusion of $153 billion of
taxpayer money, and some estimates believe that to fully cover
Fannie and Freddie losses related to mortgages may cost the
government an additional $363 billion.
The point in this discussion is that the costs of the fee
required in this bill will be passed on to the owner of the
mortgage loan, and in some cases this could represent a large
payment of taxpayer dollars.
This bill also states that the costs of the fee cannot be
passed on to borrowers. It is not specific in regards to
whether this is current or future borrowers. None the less,
while the actual fee may not be directly passed on in the form
of an itemized charge, future borrowers may potentially see
the impact of this fee in the form of higher rates or
increased closing costs.
5)Clearly, foreclosures have impacted the broader economic
conditions in California, ranging from declines in tax
revenue, the rise in unemployment and costs to local
government. However, very little data exists that point to
the specific costs of foreclosures in California. Much of the
data justifying the size of the fee is based on a study (The
Municipal Costs of Foreclosures: A Chicago Case Study, Apgar &
Duda, February 27, 2005) concerning the impact of foreclosures
in Chicago. It is unclear how the analysis of foreclosure in
Chicago translates to the costs of foreclosure in California.
The Apgar & Duda study found the costs ranged from $27 to
$35,000 under various scenarios. Additionally, another factor
that could contribute to the higher ranges for costs in
Chicago is that Illinois is a judicial foreclosure state
requiring court intervention and all of the fees and costs
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associated with it to complete a foreclosure. The
Congressional Joint Economic Committee, also broke down the
costs associated with foreclosure and in addition to Apgar &
Duda found that foreclosure costs lenders $50,000.
6)This bill exempts entities servicing for a mortgage lender
with assets below ten billion dollars. The exemption is
drafted in such a way as to exempt those entities that are
mortgage lenders, however not every entity that owns a
mortgage loan with assets below $10 billion is a mortgage
lender.
Proposed amendment.
The author's staff has indicated the desire to amend the bill to
limit its application to only those loans that exist at the time
of enactment of the legislation in an attempt to mitigate
potential costs to future mortgage borrowers. This amendment
would mean that if a loan was originated after January 1, 2012
and then fell into foreclosure, a fee would not be required to
process the trustee sale notice. This may address long term
costs, but it does not account for how the ongoing costs of
pre-2012 mortgages in foreclosure will be recouped or passed
along to various entities in the mortgage finance system.
REGISTERED SUPPORT / OPPOSITION :
Support
Alliance of Californians for Community Empowerment (ACCE)
Aspera Housing, Inc.
California Coalition for Rural Housing
California Council of Churches/California Church IMPACT
California Federation of Teachers (AFT)
California Nurses Association
California Partnership
California Professional Firefighters - Support If Amended
California Reinvestment Coalition (CRC)
California Teachers Association
Center for Responsible Lending (CRL)
Chrysalis Consulting Group, LLC
Civic Center Barrio Housing Corporation
Community Legal Services of East Palo Alto
Congregations Building Community
Consumer Attorneys of California
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Consumers Union
Contra Costa Interfaith Supporting Community Organization
(CCISCO)
Council of Mexican Federations
Dolores Huerta Foundation
Fair Housing Law Project, a project of the Law Foundation of
Silicon Valley
Greenlining Institute
Housing and Economic Rights Advocates
InnerCity Struggle
LA Voice
MAAC Project of San Diego County
National Asian American Coalition
National Council of La Raza
National Housing Law Project
Neighborhood Housing Services of Silicon Valley
Oakland Chapter, NAACP
One LA
PACE
Pacoima Beautiful
Peninsula Interfaith Action (PIA)
PICO California
SEIU United Long Term Care Workers (ULTCW)
SEIU/UHW
Service Employees International Union (SEIU)
Tenants Together
The American Federation of State, County and Municipal Employees
(AFSCME)
The San Mateo County Central Labor Council
Vallejo Neighborhood Housing Services, Inc.
Vermont Slauson Economic Development Corporation
Opposition
California Association of Realtors
California Bankers Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Land Title Association
California Mortgage Bankers Association
California Taxpayers Association
Securities Industry and Financial Markets Association
United Trustees Association
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Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081