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 (more) AB 2273 (Wieckowski) Page 2 of ? 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 AB 2273 (Wieckowski) Page 3 of ? 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 AB 2273 (Wieckowski) Page 4 of ? (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 AB 2273 (Wieckowski) Page 5 of ? 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 AB 2273 (Wieckowski) Page 6 of ? 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 AB 2273 (Wieckowski) Page 7 of ? 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 AB 2273 (Wieckowski) Page 8 of ? 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) ************** AB 2273 (Wieckowski) Page 9 of ?