BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2011-2012 Regular Session


          AB 2273 (Wieckowski)
          As Amended May 14, 2012
          Hearing Date: June 26, 2012
          Fiscal: No
          Urgency: No
          BCP:rm
                    

                                        SUBJECT
                                           
                  Common Interest Developments: Required Documents

                                      DESCRIPTION  

          Under existing law, a homeowner's association that manages a 
          common interest development may file a request for a copy of any 
          trustee's deed upon sale of the property.  That information must 
          be mailed within 15 days following the date the trustee's deed 
          is recorded. This bill would, instead, require that information 
          to be mailed within 15 days following the date of the trustee's 
          sale.  

          This bill would, with respect to property located in a common 
          interest development, require the foreclosure sale to be 
          recorded within 30 days after the date of sale, as specified.

                                      BACKGROUND  

          California, as well as the nation, is facing an unprecedented 
          threat to the economy and housing market due to increasing 
          numbers of foreclosures caused by mortgage payment defaults.  
          When a foreclosure occurs in a common interest development 
          (CID), and a struggling homeowner stops paying their association 
          dues, the association must continue to function despite that 
          loss of funds.  If that property is sold in a foreclosure sale, 
          it is in the best interest of the association to begin 
          collecting dues from the new owner of that home as soon as 
          possible. 
           
          Under the Davis-Stirling Common Interest Development Act, CIDs 
          are to be managed by a homeowners association that is authorized 
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          to levy regular and special assessments to cover operating 
          expenses and to fulfill their obligations to members of the 
          association.  After sale or transfer of ownership, the 
          subsequent owner is responsible for paying assessments from the 
          time they become the legal owner of the property.   
           
          In order to assist associations in collecting assessments from 
          subsequent purchasers of foreclosed properties, SB 1511 
          (Ducheny, Chapter 527, Statutes of 2008) allowed an association 
          to request that the person authorized to record the notice of 
          default (usually a trustee) mail the association a copy of any 
          trustee's deed within 15 business days following the date the 
          deed is recorded.  (The deed both informs the association that 
          the property was sold, and includes information about the new 
          owner of the property so that the association may begin 
          collection of dues.)  This bill would, instead, require that 
          information to be mailed within 15 business days following the 
          date of the trustee's sale.  This bill would further require the 
          transfer of a property in a common interest development after a 
          foreclosure sale to be recorded within 30 days after the date of 
          sale. 

                                CHANGES TO EXISTING LAW
           
          1.    Existing law  , the Davis-Stirling Common Interest 
            Development Act, defines and regulates common interest 
            developments (CIDs), including the ability of the association 
            to levy regular and special assessments sufficient to perform 
            its obligations.  (Civ. Code Sec. 1350 et seq.)
           
             Existing law  regulates the non-judicial foreclosure of 
            properties pursuant to the power of sale contained within a 
            mortgage contract.  To commence the process, existing law 
            requires the trustee, mortgagee, or beneficiary to record a 
            Notice of Default and requires three months to lapse before 
            setting a date for sale of the property. (Civ. Code Secs. 
            2924, 2924f.)  Existing law allows a person to record a 
            request to be notified upon the filing of a notice of default 
            or notice of sale and requires the trustee to mail notice to 
            those persons. (Civ. Code Secs. 2924b(a), 2924b(b)(1).)
             
             Existing law  permits an association to record a request that 
            the mortgagee, trustee, or other person authorized to record a 
            notice of default mail the association a copy of the trustee's 
            deed upon sale of a separate interest within the association 
            at foreclosure.  The request must include a legal description 
                                                                      



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            or the assessor's parcel number of the separate interests, the 
            name and address of the association, and a statement that it 
            is a homeowners' association. (Civ. Code Sec. 2924b(f).)
             
             Existing law  requires the above request to be recorded before 
            the filing of a notice of default, and requires the mortgagee, 
            trustee, or other authorized person to mail the requested 
            information to the association within 15 business days 
            following the date the trustee's deed is recorded. (Civ. Code 
            Sec. 2924b(f).)

             This bill  would, instead, require the mortgagee, trustee, or 
            other authorized person to mail the requested information to 
            the association within 15 business days following the 
            trustee's sale.

          2.    Existing law  provides that every grant of an estate in real 
            property is conclusive against the grantor, also against 
            everyone subsequently claiming under him, except a purchaser 
            or incumbrancer who in good faith and for a valuable 
            consideration acquires a title or lien by an instrument that 
            is first duly recorded. (Civ. Code Sec. 1107.)
           
            This bill  would provide that, notwithstanding any other law, 
            the transfer, following the sale of property in a common 
            interest development executed under the power of sale 
            contained in any deed of trust or mortgage, shall be recorded 
            within 30 days after the date of sale in the office of the 
            county recorder where the property or a portion of the 
            property is located.

             This bill  would state that failure to comply with the above 
            recording requirement shall not affect the validity of a sale 
            in favor of a bona fide purchaser. 

                                        COMMENT
           
          1.   Stated need for the bill  

          According to the author:

            AB 2273 seeks to streamline the existing process for the 
            mortgagee or trustee to provide this information in a timely 
            manner to the HOAÝ(homeowner's association)], a process 
            which was established with the participation of HOAs, banks, 
            and other stakeholders through discussions over SB 1511 
                                                                      



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            (Ducheny) of 2008.  Since SB 1511 became law, HOAs have 
            reported continued difficulties in obtaining the information 
            they need to invoice the new owner its fair share of 
            assessments, and this proposed amendment is intended to 
            address the negative impact to HOAs that reportedly arises 
            from excessive delays in recording the deed. 

            AB 2273 addresses the above problem by making the 
            purchaser/new owner of property in a common interest 
            subdivision responsible for informing the homeowners 
            association of its interest, so that the party responsible 
            for property maintenance may be found and assessed. This 
            amendment will place a minimal burden on the new 
            owner/purchaser, while providing a significant benefit to 
            the association and its other members by ensuring timely 
            collection of association dues from the proper owner of the 
            property.  In an effort to encourage foreclosing lenders to 
            record a deed of trust after foreclosure, AB 2273 requires 
            the trustee to record the deed within 30 days of the sale in 
            the county in which the foreclosed property is located.  

          2.   Problems related to delays in filing the trustee's deed  

          SB 1511 (Ducheny, Chapter 527, Statutes of2008) permitted a 
          homeowner's association to request that the person authorized to 
          record a notice of default mail to the association the trustee's 
          deed upon sale in foreclosure.  That bill required that person 
          to mail the trustee deed to the association within 15 business 
          days following the date of trustee's deed is recorded.  Upon 
          receipt of the deed, the association can then begin collecting 
          assessments from the subsequent owner based upon the contact 
          information contained within that document.  

          In response to concerns about excessive delays in the recording 
          of the trustee's deed, this bill would, instead require the deed 
          to be mailed to the association within 15 business days 
          following the date of the sale.  By requiring the deed to be 
          mailed within 15 days of the sale, as opposed to the recording 
          of the trustee's deed, this bill seeks to ensure that the 
          association is informed of the change in owner even if there is 
          a delay in recording the deed.  The author further notes:

            All too often, in the current market, a beneficiary under a 
            deed of trust will acquire title to a separate interest 
            through foreclosure, or under a "Deed in Lieu" and will 
            provide no notice to an Association, whose interest is of 
                                                                      



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            record, that the beneficiary has acquired title.  Following 
            foreclosure then, the acquiring beneficiary may fail to take 
            action with regard to maintenance of the property or to the 
            obligations due under the Association's CC&Rs Ý(covenants, 
            conditions, and restrictions)].  However, because the 
            Association is left unaware of any change in title, it is 
            deprived of its right to seek any redress with the owner of 
            record, and the other members of the Association are left to 
            pay the price for the neglectful owner whether it be loss of 
            assessments, or depreciation of neighboring property. 

          Accordingly, this bill seeks to ensure that associations have 
          accurate information about the current owner of a foreclosed 
          property to ensure that the association can hold the appropriate 
          individual (or entity) responsible for his or her obligations 
          with respect to the property.  From a policy standpoint, it 
          appears appropriate to ensure than an association is notified 
          upon the sale of a property within a common interest development 
          (CID); failure to notify the association may create a situation 
          where the prior owner is billed for assessments that should 
          technically be paid by the current owner of the property.

          3.   Requiring recording of the trustee's deed with 30 days of 
          the sale  

          Recording statutes play an important role in resolving conflicts 
          as to who may own a piece of property.  California, a 
          "race-notice" jurisdiction, requires conveyances of real 
          property to be recorded in order to be valid against other 
          purchasers of the same property from the owner, provided certain 
          conditions are met.  A subsequent purchaser of the same property 
          for value "wins" if they had no knowledge of the prior transfer, 
          and they record before the prior purchaser.  As a result of that 
          principle, prospective purchasers must search to see if there 
          are any adverse records that may create a cloud on title, and, 
          upon purchase, must record as soon as possible to preserve clear 
          title. (Essentially, a cloud on title is a property interest 
          that prevents a party from receiving a clear title to the 
          property.)  As a result of California being a race-notice 
          jurisdiction, existing law generally does not require transfers 
          of property to be recorded within a specific timeframe, 
          although, persons purchasing properties have a strong incentive 
          to record the transfer so as to "prevail" against any subsequent 
          purchaser.

          In order to further address issues related to foreclosing 
                                                                      



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          lenders failing to record the trustee's deed in a timely manner, 
          this bill would require the transfer of a property in a CID to 
          be recorded within 30 days after the date of sale.  That 
          provision would only apply to sales that were the result of the 
          lender exercising the "power of sale" in a deed of trust or 
          mortgage (in other words, foreclosed homes).  Failure to comply 
          with that section would not affect the validity of a sale in 
          favor of a bona fide purchaser.  In support of the need to 
          require recording of the transfer, the Community Associations 
          Institute (CAI), co-sponsor, asserts:

            Intentionally or otherwise, some lenders that have been 
            foreclosing on homes in homeowners associations (HOAs) do 
            not record the sale for months, if not years, for purposes 
            best known to them.  When the sale of a property is not 
            recorded homeowners associations have no current record of 
            whom to invoice for maintenance assessments (dues).

          CAI further asserts that, as a result of the failure to record 
          the transfer, assessments are not paid, maintenance is 
          "crippled," remaining homeowners are forced to pay higher 
          assessments, neighborhoods turn into blight, and county 
          assessors cannot bill for property tax.  CAI also notes that 
          their survey of HOAs found:

                 49 percent of all HOA sales were foreclosures and short 
               sales.
                 75 percent of the time a lender will not foreclose when 
               an owner vacates.
                 73 percent of foreclosure sales are not recorded for at 
               least 60 days.
                 23 percent of foreclosure sales are not recorded for at 
               least 180 days.
                 76 percent of the time current assessments are not paid 
               until 60 days after foreclosure.
                 28 percent of the time current assessments are not paid 
               until 120 days after foreclosure.
                 14 percent of the time current assessments are not paid 
               until 180 days after foreclosure.
                 79 percent of the time lenders fail to pay any portion 
               of past due assessments.

          Although, from a policy standpoint, financial institutions that 
          receive title to foreclosed homes after the trustee's sale 
          should not be able to avoid payment of assessments (and other 
          charges) after becoming the owner of the property, requiring 
                                                                      



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          recordation of the transfer is arguably inconsistent with 
          California's status as a race-notice jurisdiction.  Despite that 
          inconsistency, requiring recording of the transfer in this 
          circumstance would appear to help address a serious problem 
          facing HOAs and the countless individuals who do live in CIDs.  
          The author further asserts:  "Under the common law scheme of 
          property, ownership must be open and notorious.  That is to say, 
          that the owner must hold himself out to the public as owner of 
          the property in order for our recording system to work and be 
          effective."  The California Building Industry Association, in 
          support, further asserts that the recording "is consistent with 
          California's public policy of openness and fair dealings.  The 
          burden of recording is relatively small in comparison to the 
          burden consequently imposed upon remaining owners in the 
          association."

          The United Trustee's Association, in an oppose unless amended 
          position, contends:

            Our objection is to the requirement contained in proposed 
            new Civil Code Section 2941.1 to record trustee's deeds 
            within 30 days after the foreclosure sale.  While this 
            standard may not be overly burdensome in the usual 
            circumstances, there will be cases outside of the control of 
            the trustee where the deed is not recorded within the 
            required timeframe.

            Two examples are these:  the trustee's deed is mailed to the 
            county recorder for recordation, where because of workload 
            or inadvertence the deed sits at the recorder's office 
            unrecorded.  Through no fault of the trustee, the 30-day 
            standard is violated, and obviously once the 30-day period 
            has elapsed, compliance is impossible.  A second example 
            relates to threatened litigation after the foreclosure sale. 
             Sometimes unsuccessful bidders at the sale raise procedural 
            objections and threaten to sue.  The trustee may delay 
            recording the trustee's deed to determine if the matter can 
            be resolved.

            Additionally, the bill fails to clarify the question of 
            title to the property if the 30-day timeframe is missed. 
            Litigation may be required to determine the validity of the 
            underlying foreclosure sale.  Language to clarify this issue 
            should be included within AB 2273.

          Staff notes that the bill's language arguably leaves open the 
                                                                      



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          question about whether an inadvertent failure to record the 
          transfer may affect the validity of a transfer of the property 
          to the foreclosing financial institution after the foreclosure 
          sale.  As the validity of that transfer is essential to ensure 
          that the financial institution is fully obligated to both pay 
          assessments and maintain the property, the following author's  
          amendment would clarify that failure to comply shall also not 
          affect the validity of a trustee's sale. 

                Amendment:  

               On page 7, line 39 before sale, insert:  trustee's sale or 


           Support  :  California Association of Realtors; California 
          Building Industry Association (CBIA); Community of Shadowridge 
          Owners' Association; Congress of California Seniors; Executive 
          Council of Homeowners; Garden Isle Homeowner's Association; 
          Golden Rain Foundation; Southwest California Legislative 
          Council; Sun City Palm Desert; Sun City Roseville Association; 
          numerous individuals

           Opposition  :  United Trustee's Association

                                        HISTORY
           
           Source  :  Community Associations Institute; Conference of 
          California Bar Associations 

           Related Pending Legislation  :  None Known

           Prior Legislation  :  SB 1511 (Ducheny, Chapter 527, Statutes of 
          2008) See Background.

           Prior Vote :

          Assembly Housing & Community Development Committee (Ayes 7, Noes 
          0)
          Assembly Judiciary Committee (Ayes 8, Noes 1)
          Assembly Floor (Ayes 50, Noes 24)

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