BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
SB 983 (Morrell)
Version: March 28, 2016
Hearing Date: April 26, 2016
Fiscal: No
Urgency: No
TH
SUBJECT
Mortgages and Deeds of Trust
DESCRIPTION
This bill would make the following changes to existing law
pertaining to the non-judicial foreclosure process:
during non-judicial foreclosure, trustees would be authorized
to provide copies of notices of default listing the date of
recordation, rather than an actual copy of the recorded notice
of default;
trustees would not be the legal owner of property going
through the non-judicial foreclosure process for the purposes
of registering or having a duty to maintain the property;
the statutory base rate trustees may charge for executing the
non-judicial foreclosure process would increase from either
$250 to $300, or $300 to $350, depending on the unpaid
principal sum of the loan;
the statutory base rate trustees may charge for executing the
sale of a property through non-judicial foreclosure would
increase from either $360 to $410, or $425 to $475, depending
on the unpaid principal sum of the loan;
the "Notice to Bidders" provided at a trustee sale for
property being auctioned would be re-worded to indicate that a
bidder is bidding on the property itself rather than a lien on
the property; and
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other clarifying and technical changes.
BACKGROUND
In California, homes are typically purchased with a loan secured
by a deed of trust against the subject property. A trustee
holds legal title to the property in trust for the beneficiary,
which is often the lender. Should the borrower (trustor) fail
to meet his or her obligations under the loan, the trustee
through a power of sale clause in the deed of trust can commence
foreclosure, wherein the property is typically put up for
auction by the trustee and title transfers to the highest
bidder.
Foreclosures in California are generally non-judicial, meaning
that they are accomplished without court involvement. The
first step in the non-judicial foreclosure process is the filing
of a Notice of Default, which generally occurs after three or
more months of delinquency. The foreclosing entity, typically
the trustee, must then generally wait at least three months
before noticing the sale of the property, which is posted,
published, and filed with the county recorder. Existing law
requires a foreclosing entity to provide borrowers with a copy
of the recorded Notice of Default that includes a summary of the
notice, and similarly, a copy of a recorded Notice of Sale that
also includes a summary.
During non-judicial foreclosure, existing law places certain
duties on trustees and beneficiaries to maintain vacant
properties, governs how trustee sales may be conducted, and
limits the compensation rate trustees may charge. This bill
would alter existing law to allow trustees to provide copies of
notices of default listing the date of recordation in lieu of an
actual copy of the recorded notice of default, would state that
a trustee is not the legal owner of property for purposes of the
duty to maintain such property, would increase the statutory
base rate trustees may charge at various stages in the
non-judicial foreclosure process, would change the wording of an
advisory provided to bidders at a trustee sale, and would make
other clarifying and technical changes.
CHANGES TO EXISTING LAW
1.Existing law regulates the non-judicial foreclosure of
properties pursuant to a power of sale clause contained within
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a mortgage contract. To commence the process, existing law
requires the trustee, mortgagee, or beneficiary to record a
Notice of Default and allow three months to lapse before
setting a date for sale of the property. (Civ. Code Secs.
2924.)
Existing law provides that with respect to residential real
property containing no more than four dwelling units, a
mortgagee, trustee, beneficiary, or authorized agent shall
provide to the mortgagor or trustor a copy of the recorded
notice of default with a summary document of the notice of
default, and a copy of the recorded notice of sale with a
summary document of the information required to be contained
in the notice of sale, as specified. (Civ. Code Sec. 2923.3.)
This bill would instead state that a mortgagee, trustee,
beneficiary, or authorized agent shall provide to the
mortgagor or trustor a copy of the notice of default
indicating the recording date with a summary document of the
notice of default, and a copy of the notice of sale indicating
the recording date with a summary document of the information
required to be contained in the notice of sale.
2.Existing law states that a legal owner shall maintain vacant
residential property purchased by that owner at a foreclosure
sale, or acquired by that owner through foreclosure under a
mortgage or deed of trust. Existing law defines "failure to
maintain" to mean failure to care for the exterior of the
property, including, but not limited to, permitting excessive
foliage growth that diminishes the value of surrounding
properties, failing to take action to prevent trespassers or
squatters from remaining on the property, or failing to take
action to prevent mosquito larvae from growing in standing
water, or other conditions that create a public nuisance.
Existing law authorizes a governmental entity to impose a
civil fine of up to $1,000 per day for a violation, as
specified. (Civ. Code Sec. 2929.3.)
This bill would provide that a trustee under a deed of trust
shall not be a legal owner or owner for purposes of the above
provision, and shall not be responsible for any obligation or
failure to maintain or register a property subject to
foreclosure.
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3.Existing law provides that trustee's or attorney's fees which
may be charged during the non-judicial foreclosure process or
until the notice of sale is deposited in the mail to the
trustor or at any time prior to the decree of foreclosure,
shall not exceed $300 if the unpaid principal sum secured is
$150,000 or less, or $250 if the unpaid principal sum secured
exceeds $150,000, plus a specified percentage of the unpaid
principal sum. (Civ. Code Sec. 2924c.)
This bill would increase the base amount that may be charged
pursuant to the above provision to $350 and $300,
respectively.
4.Existing law states that commencing with the date that the
notice of sale is deposited in the mail and until the property
is sold pursuant to the power of sale contained in the
mortgage or deed of trust, a beneficiary, trustee, or
mortgagee may demand and receive from a trustor or mortgagor
reasonable costs and expenses actually incurred in enforcing
the terms of the obligation, as specified, and trustee's or
attorney's fees in an amount that does not exceed $425 if the
unpaid principal sum secured is $150,000 or less, or $360 if
the unpaid principal sum secured exceeds $150,000, plus a
specified percentage of the unpaid principal sum. (Civ. Code
Sec. 2924d.)
This bill would increase the base amount that may be charged
pursuant to the above provision to $475 and $410,
respectively.
5.Existing law states that a notice of sale concerning a
property undergoing non-judicial foreclosure must contain,
among other things, the following statement:
NOTICE TO POTENTIAL BIDDERS: If you are considering bidding on
this property lien, you should understand that there are risks
involved in bidding at a trustee auction. You will be bidding
on a lien, not on the property itself. (Civ. Code Sec.
2924f.)
This bill would modify the above notice to state "NOTICE TO
POTENTIAL BIDDERS: If you are considering bidding on this
property, you should understand that there are risks involved in
bidding at a trustee auction." This bill would strike "you will
be bidding on a lien, not on the property itself" from the text
of the notice.
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COMMENT
1.Stated need for the bill
According to the author:
When a borrower defaults in the payment of a real estate loan,
California law provides lenders with two main remedies to
recover the property: judicial and nonjudicial foreclosures.
Judicial foreclosures require court action and are quite rare.
Nearly every foreclosure in California is nonjudicial.
Because courts are not involved, California law is extremely
precise in prescribing foreclosure procedures. The entire
process is provided in the Civil Code.
In order to obtain a real estate loan in California, a
borrower executes a "deed of trust" (commonly referred to as a
mortgage) in favor of the lender. Technically, the deed of
trust transfers bare legal title to the trustee, a third party
with only two duties: re-convey the deed of trust if the loan
is paid off, and commence foreclosure if the borrower
defaults. Trustees perform these functions in strict
accordance with the Civil Code.
SB 983 addresses four issues relating to nonjudicial
foreclosures by trustees. Those issues are as follows:
The law requires trustees to provide borrowers with
copies of foreclosure documents, including copies of
recorded notices of default and notices of sale. After
trustees record these documents, the actual recorded
documents sometimes are not returned for weeks by counties.
SB 983 instead requires trustees to provide copies of the
documents with the recording date indicated.
Existing Civil Code Section 2924f contains a notice to
potential bidders at foreclosure sales, warning them that
the loan in foreclosure may be a junior lien, making the
bidder responsible for existing senior liens. There are
technical inaccuracies in the notice being clarified in SB
983.
Existing provisions of law require legal owners to
maintain properties following foreclosure sales, in order
to prevent blight. Although a trustee named in a deed of
trust technically has a form of legal title to properties,
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they are not "owners" in any real sense. SB 983 clarifies
that trustees are not owners for purposes of maintenance
obligations.
Current provisions of the Civil Code prescribe maximum
trustee's fees for conducting foreclosures. The law
provides base fees with additional percentages based upon
the size of the loan in default. These base fees have not
been increased since 2001. SB 983 provides for modest
increases in the base fees, amounting to less than one
percent per year since the last increase.
1.Providing copies of recorded documents
Foreclosures in California are generally non-judicial, meaning
that they are accomplished without court involvement or
oversight. This lack of judicial oversight has, in some cases,
allowed fraudulent activity to occur. According to the
California Department of Real Estate:
There are numerous types and scenarios of deed fraud, and they
are only limited by the creativity, abilities, and tactics of
the fraudsters. . . . A fraudster may forge a homeowner's name
on a quitclaim deed or another deed to a home. The deed is
acknowledged and signed by a notary public (either
legitimately based on false identification or illegitimately),
and then recorded, effectively transferring the property to
the scammer without the knowledge of the true homeowner. The
bad actor then obtains a mortgage loan on the home and uses
the loan proceeds for his or her own use. The loan payments
are not made and the home goes into foreclosure. (Department
of Real Estate, CONSUMER ALERT: What Should You Do If You
Learn That a Forged and/or Fraudulent Deed Has Been Recorded
Against Your Real Property? [Mar. 17, 2012].)
Recently, a California Court of Appeal found that JPMorgan Chase
engaged in deed fraud when it created and recorded false
documentation purportedly showing that the bank owned the
mortgage of two California residents in order to foreclose on
their home. (See Ben Lane, Chase's Fraudulent Foreclosure:
Court Finds for Plaintiffs (Jul. 2, 2014)
[as of Apr.
21, 2016].) The Legislature has responded to fraudulent
activity of this type by, among other things, authorizing local
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government to provide copies of documents recorded against a
property owner's title directly to owners (see SB 827 [Liu, Ch.
65, Stats. 2014]), and requiring trustees to provide copies of
certain recorded documents to homeowners who are going through
non-judicial foreclosure (see Civ. Code Sec. 2923.3.).
This bill would authorize trustees to provide copies of notices
of sale and notices of default with their date of recordation
indicated in lieu of copies of documents that were actually
recorded. Given the growth of deed-related fraud, many
homeowners have come to rely on the endorsement of a county
recorder to authenticate recorded title documents. While it
does take additional time to receive copies of recorded
documents, eliminating the responsibility of trustees to provide
an actual copy in favor of another document indicating the date
a notice was recorded may undermine confidence in California's
unsupervised non-judicial foreclosure process.
Recognizing this problem, the author offers the following
amendment to strike this provision from the bill:
Author's Amendment
On page 3, strike Section 1
2.Duty to maintain vacant property
Existing law states that the "legal owner" of a property
purchased at a foreclosure sale, or acquired through foreclosure
under a mortgage or deed of trust has a duty to maintain that
property. (Civ. Code Sec. 2929.3.) Failure to maintain a
property, which includes failing to care for the exterior of the
property, permitting excessive foliage growth that diminishes
the value of surrounding properties, failing to take action to
prevent trespassers or squatters from remaining on the property,
or failing to take action to prevent mosquito larvae from
growing in standing water, or other conditions that create a
public nuisance, carries with it the possibility of a daily
$1,000 fine. This duty of an owner to maintain foreclosed-upon
properties was enacted after several localities experienced
widespread blight during the height of the housing crisis. A
Los Angeles Times story written during the crisis noted that
"[h]ouses abandoned to foreclosure [were] beginning to breed
trouble, adding neighbors to the growing ranks of victims," and
observed how:
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Stagnant swimming pools spawn mosquitoes, which can carry the
potentially deadly West Nile virus. Empty rooms lure
squatters and vandals. And brown lawns and dead vegetation
are creating eyesores in well-tended neighborhoods. (David
Streitfeld, Blight Moves In After Foreclosures, Los Angeles
Times
[as of Apr. 21, 2016].)
Existing law does not differentiate between trustees and
beneficiaries or lenders in placing the duty to maintain
foreclosed property. As noted above, in California a trustee
typically holds legal title to "mortgaged" properties in trust
for a beneficiary, which is often the lender. Equitable title,
in contrast, is held by the trustor or borrower, and title
normally shifts to the beneficiary at the conclusion of the
foreclosure process. While the law concerning the duty to
maintain makes no differentiation between trustee and lender, in
practice these parties often establish by contract which entity
will be responsible for the maintenance of a property.
This bill states that, for purposes of the duty to maintain a
foreclosed-upon property, a trustee shall not be considered the
"legal owner" of the property. This provision would have the
effect of insulating trustees from the duty to maintain such
properties, and from enforcement actions brought by local
governments for that failure to maintain. While it is likely
the case that trustees are not typically responsible for the
maintenance of vacant properties as a matter of contract,
memorializing this arrangement in law removes a potentially
responsible party local governments could pursue when combatting
blight.
Recognizing this problem, the author offers the following
amendment to strike this provision from the bill:
Author's Amendment
On page 13, strike Section 2
3.Notice to potential bidders during trustee sales
For individuals who seek to buy properties at trustee sales, the
sale offers the potential for getting a good "deal" on a home,
but carries significant risks if the would-be purchaser has not
done extensive research on the property. Although purchasers
may look at the home and its surrounding neighborhood, it is
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essential for them to also do a title search on the property to
see if there are any other liens that are not going to be
extinguished by the trustee sale. If a purchaser purchases a
home subject to a senior lien, for example, the purchaser must
satisfy that senior lien or face foreclosure of their junior
interest by that lien. This precise scenario was described in a
2010 San Francisco Chronicle article entitled Winning Bid on
Mortgage Buys Family Heartache. The Chronicle reported that:
Roberta and Randall Strand took $97,606 out of their paid-off
house to buy a foreclosed home at a courthouse auction. Five
months later, they found out they actually bought the second
mortgage, and that the bank planned to foreclose on the first
mortgage, leaving them out in the cold. The family received and
recorded a "trustee's deed upon sale" in November 2009, shortly
after the auction, without realizing that they had bought a
second mortgage.
. . .
"Apparently, unbeknownst to us, Wachovia sold us a worthless
second mortgage that was part of a piggyback loan made to the
previous owners," Roberta Strand said. "Both loans were
originated, signed and recorded on the same date. Rather than
foreclose on both loans at the same time, Wachovia chose to
foreclose, market and sell the worthless junior lien, purporting
it to be the real property, which is what we purchased."
(Carolyn Said, Winning Bid on Mortgage Buys Family Heartache
(Aug. 2, 2010)
[as of Apr. 21, 2016].)
Responding to events such as this, the Legislature enacted SB 4
(Calderon et. al., Ch. 229, Stats. 2011), which required
consumers to be given a specific notice at a trustee sale
stating:
NOTICE TO POTENTIAL BIDDERS: If you are considering bidding on
this property lien, you should understand that there are risks
involved in bidding at a trustee auction. You will be bidding
on a lien, not on the property itself. Placing the highest bid
at a trustee auction does not automatically entitle you to
free and clear ownership of the property. You should also be
aware that the lien being auctioned off may be a junior lien.
If you are the highest bidder at the auction, you are or may
be responsible for paying off all liens senior to the lien
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being auctioned off, before you can receive clear title to the
property. You are encouraged to investigate the existence,
priority, and size of outstanding liens that may exist on this
property by contacting the county recorder's office or a title
insurance company, either of which may charge you a fee for
this information. If you consult either of these resources,
you should be aware that the same lender may hold more than
one mortgage or deed of trust on the property.
This bill would modify the above notice to strike the sentence
that reads "you will be bidding on a lien, not on the property
itself," and would change the opening sentence to state that a
bid at a trustee sale would be on a property rather than a lien
on a property.
When an individual places a bid at a trustee sale, they are
neither bidding on a lien or on a piece of property. Rather,
they are bidding to acquire certain rights to the subject
property, which may ultimately result in the transfer of title
and possession. Importantly, the notice provided to potential
bidders by SB 4 was not intended to give legal advice. Rather,
it was meant as a warning to consumers to investigate precisely
what is being offered at auction before participating in the
sale. Given this objective, changing the wording of the notice
as proposed in this bill may undermine its efficacy.
Recognizing this problem, the author offers the following
amendment to strike this provision from the bill:
Author's Amendment
On page 25, strike Section 7
4. Increase in allowable fees
Existing law limits the amount a trustee may receive in
compensation for executing the non-judicial foreclosure process.
Under current law, allowable trustee fees are capped at various
stages of the foreclosure process. For foreclosure proceedings
that are resolved at the Notice of Default stage, a trustee may
charge no more than $300 if the unpaid principal sum secured is
$150,000 or less. If the unpaid principal sum secured exceeds
$150,000, a trustee may charge $250 plus one-half of 1 percent
of the unpaid principal sum secured between $50,000 and
$150,000, plus one-quarter of 1 percent of the unpaid principal
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sum secured between $150,000 and $500,000, plus one-eighth of 1
percent of the unpaid principal sum secured in excess of
$500,000. For foreclosure proceedings that are resolved at or
after the Notice of Sale stage, a trustee may charge no more
than $425 if the unpaid principal sum secured is $150,000 or
less. If the unpaid principal sum secured exceeds $150,000, a
trustee may charge $360 plus 1 percent of the unpaid principal
sum secured between $50,000 and $150,000, plus one-half of 1
percent of the unpaid principal sum secured between $150,000 and
$500,000, plus one-quarter of 1 percent of the unpaid principal
sum secured in excess of $500,000. This bill would increase
each of the four authorized base rates by $50.
The current trustee rate structure was implemented in 2002 by SB
958 (Ackerman, Ch. 438, Stats. 2001) and has not been altered in
the intervening 14 years. While the price of housing, and
ostensibly the amounts secured by deeds of trust, have gone up
in California in the intervening years, these base allowance
rates have remained static. As a result, the amount trustees
earn in compensation at the lower end of the tiered allowance
structure has declined relative to consumer price indices. This
bill would authorize a relatively minor adjustment upward for
those base rates. While a consumer who seeks to redeem a
property going through foreclosure would have to pay the trustee
this increased base rate as part of the redemption process, the
increase is not likely to comprise a significant part of the
redemption price.
Support : None Known
Opposition : None Known
HISTORY
Source : United Trustee's Association
Related Pending Legislation : None Known
Prior Legislation :
SB 4 (Calderon et. al., Ch. 229, Stats. 2011) required, among
other things, that a notice of sale given pursuant to a deed of
trust or mortgage secured by real property contain language
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notifying potential bidders of specified risks involved in
bidding on property at a trustee's sale, as well as a notice to
the property owner informing the owner about how to obtain
information regarding any postponement of the sale.
SB 1137 (Perata et. al., Ch. 69, Stats. 2008) enacted several
changes to the procedures that must be followed before the
holder of a mortgage may issue a notice of default or notice of
trustee sale, required the holder of a mortgage to mail a
specified notice to the tenant(s) of a property on which
foreclosure proceedings have begun, and imposed penalties on
property owners who failed to adequately maintain foreclosed
properties, as specified.
SB 958 (Ackerman, Ch. 438, Stats. 2001) implemented the current
maximum levels of compensation a trustee may receive for
executing the non-judicial foreclosure process.
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