BILL ANALYSIS
AB 2347
Page 1
Date of Hearing: April 27, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2347 (Feuer) - As Amended: April 20, 2010
SUBJECT : MORTGAGE DEFAULTS: SECONDARY PUBLIC FINANCING
KEY ISSUE : SHOULD PUBLIC AGENCIES THAT PROVIDE FINANCIAL
ASSISTANCE TO MULTIFAMILY PROPERTIES IN ORDER TO SECURE
AFFORDABLE HOUSING UNITS BE PROVIDED SUFFICIENT TIME TO
INTERVENE TO PRESERVE THE AFFORDABLE UNITS PRIOR TO THE PROPERTY
BEING SOLD IN A FORECLOSURE PROCEEDING?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill is sponsored by the City of Los Angeles and supported
by other public agencies and advocates for affordable housing.
It would allow public entities a limited and temporary
opportunity to postpone foreclosure on multifamily residential
property where public tax investments are at risk, in order to
provide an opportunity for the public entity to obtain financial
information from the appointed receiver necessary to take
appropriate action to protect public funds and affordable
housing if possible. The bill is opposed by the California Land
Title Association, which contends that the problem should be
solved by forcing receivers to provide information more quickly
or by public agencies acting more swiftly within the ample time
the title insurers contend they now have. CLTA also argues that
the bill is poorly drafted and will have negative consequences
for consumers and the housing market.
SUMMARY : Provides a temporary respite from foreclosure
procedures for affordable multifamily housing where public
financing is at risk in order to allow a public agency to take
appropriate action to respond. Specifically, this bill provides
that if a property contains two or more dwelling units and a
public entity holds a deed of trust or is a party to a recorded
rent regulatory agreement on the property, the public entity
may, by written notice to the trustee, postpone the sale date by
no more than 60 days.
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EXISTING LAW requires a lender to file a notice of default in a
nonjudicial foreclosure prior to enforcing a power of sale as a
result of a default on an obligation secured by real property,
as specified, and requires that a notice of sale be given before
the power of sale may be exercised. (Civil Code section
2924(f).)
COMMENTS : According to the author, this bill is intended to
mitigate the impacts of the foreclosure crisis on the
availability of affordable housing in California. When public
agencies have provided financial assistance to multifamily
properties in exchange for securing some percentage of
affordable housing unites, the author states, those agencies
should have an opportunity to intervene to either purchase the
property or find a purchaser for the property that will preserve
the affordable units before the trustee concludes foreclosure
proceedings.
The author states that AB 2347 would help local governments
protect their investments in affordable rental housing,
threatened by foreclosure, by providing 60 additional days
before an agency-assisted affordable development can be sold in
foreclosure.
Public Agency Financial Assistance Put At Risk By Foreclosure.
Supporters note that public agencies, typically city or county
housing departments, frequently provide financial assistance to
multifamily properties. Deeds of trust and/or regulatory
agreements secure the loans and ensure that the properties
remain affordable to eligible families. These affordability
agreements are usually subordinated to mortgages or similar
interests held by private lenders. If the owner defaults on the
private loan and a foreclosure ensues, the public agency's
investment and affordability conditions are wiped out.
According to supporters, in the last three years in the City of
Los Angeles alone, 22 separate loans for multifamily
developments in the City's portfolio were threatened with
foreclosure. If all these loans were wiped out, the City of Los
Angeles would lose approximately $23 million, and the
affordability restrictions on many affordable rental units.
The author observes that a receiver is typically appointed to
evaluate and report on the property's operations and financial
condition in a foreclosure on a multifamily residence. A public
agency with a subordinated interest in the property uses the
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receiver's report to conduct an economic analysis. This
analysis is the basis for a locality's action plan for the
property. The local legislative body must review and approve
the best fiduciary course of action regardless of its threatened
investment and loss of housing.
The problem, supporters state, is that too often the report
arrives too late for the local government to utilize it for this
analysis. The foreclosure process requires that a foreclosed
multi-family property be sold at a public auction. In the
current process, government agencies that are the secondary loan
holder are not given ample time to approve the funds, make a
bid, cure a default or buy a distressed property to ensure that
it remains affordable.
This Bill Would Allow A Temporary Stay Of The Foreclosure
Process Upon Written Notice To The Trustee. In order to allow
public agencies an appropriate opportunity to obtain a
meaningful receiver's report, determine a course of action, and
take steps to protect public investments, this bill would allow
public agencies to send a written notice to the trustee to
temporarily postpone a foreclosure sale for up to 60 days. The
postponement could only be exercised if: (1) the public agency
holds a trust deed or rent regulatory agreement on the property;
and (2) the property contains two or more units.
AB 2347 would, supporters contend, ensure that local governments
have a fair opportunity to obtain the receiver's reports and
other assessments of the property - not just days before the
sale is scheduled, but in time to evaluate the information, and
decide whether to commit scarce financial resources to salvage
the long-term affordability of these valuable, rent-restricted
apartments.
ARGUMENTS IN OPPOSITION : The Committee received late opposition
to the bill from the California Land Title Association,
contending as follows:
If a public entity has a trust deed or rent regulatory
agreement on property they do not have the legal authority
to instruct the holder of a trust deed to postpone a
foreclosure sale. This is because they do not have privity
of contract with the trustee and also are not a party to
the trust deed being foreclosed. If a "public entity" has
a junior lien they can protect their interest like any
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other junior by paying off the senior or bidding at the
foreclosure sale and are already being notified by the
trustee through the process established under existing law.
Under existing law, a "public entity" that has a regulatory
agreement in a second deed of trust (or subsequent deed of
trust) unfortunately gets wiped out when a senior lien
forecloses. If they want to protect their agreement they
can pay off the senior being foreclosed. It is our
understanding that foreclosures are typically taking
several months which would seem to provide AMPLE time for a
public entity to become aware of a foreclosure that is
pending and to make a calculated decision on whether or not
to intervene. If notification from a receiver is not being
done, then that process needs to be improved at the local
level or addressed through additional obligations place
upon receivers.
As currently drafted, several terms are undefined and
create huge potential problems for consumers, title
companies, lenders, real estate professionals, and other
interested parties. Specifically, from this one section
alone, the following terms are undefined: What is a "public
entity" under this bill and how would that be ascertained
and by whom? Could a "public entity" notify an escrow
holder or title company at any time and still postpone the
sale even if the sale is just hours away? What happens to
a consumer/bona fide purchaser who happens to purchase a
multi-family unit and is unaware that notification to a
"public entity" has not taken place? Can the sale be set
aside and the postponement subsequently granted? In other
words, what is the effect if the notification does not take
place and the public entity has not asked for a
postponement?
If a consumer/investor isn't using a title company to
conduct a title search or facilitate a transfer of this
type of property, they are even more at risk and may not
have an underlying title insurance policy to protect them
if their sale is set aside, postponed, or delayed.
A 60 day delay outlined in this bill may put at risk other
contingent financing or other transactions hinging on such
a sale, and may result in a total failure of a transaction
because of the timing of related contingencies. In short,
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a consumer purchasing this type of property may suffer
unintended monetary losses because they did not anticipate
such a delay. This is even if they exercise due diligence
and conduct a thorough title search of recorded county
records.
As indicated above, these new requirements would increase
the risk for buyer/consumers who would be wary of investing
in multifamily housing if such an investment has a higher
risk associated with it. 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?
REGISTERED SUPPORT / OPPOSITION :
Support
City of Los Angeles (sponsor)
California Rural Legal Assistance Foundation
California State Association of Counties
League of California Cities
Western Center on Law and Poverty
Opposition
California Land Title Association
Analysis Prepared by : Kevin G. Baker and Ariel Gabbert / JUD. /
(916) 319-2334