BILL ANALYSIS
AB 2347
Page 1
Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2347 (Feuer) - As Amended: April 20, 2010
SUBJECT : Mortgage defaults: secondary public financing
SUMMARY : 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.
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 date
for sale of the property. [Civil 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 sale to be made, as specified, at least 20
days prior to the date of sale. [Section 2924f].
FISCAL EFFECT : Unknown
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 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 by either purchasing the property or finding 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,
AB 2347
Page 2
threatened by foreclosure, by providing 60 additional days
before an agency-assisted affordable development can be sold
through 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
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.
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
AB 2347
Page 3
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 : While the committee did not receive
any opposition letters on this bill, the Assembly Judiciary
Committee analysis noted the following opposition 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
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
AB 2347
Page 4
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,
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?
Amendments :
Committee staff is aware that the author's office has conducted
several meetings with interested parties to further narrow and
clarify this bill. In the mean-time the committee may wish to
consider the following amendments.
AB 2347
Page 5
1)Provide a definition of "public entity." Committee staff
recommends the following:
"Public entity" includes a county, city, city and county,
redevelopment agency or any other political subdivision thereof.
2)Clarify that a foreclosure stay may be requested only once by
one and that that the application is further limited to
properties with five or more dwelling units. On Page 6,
starting with line 8, make the following changes.
(d) If a property contains two or more dwelling five or
more multifamily 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.
(i) if multiple public entities hold deeds of
trust, or are parties to a recorded rent regulatory agreement on
the property pursuant to this subsection, only one entity may
postpone the sale date.
(ii) The power under this subsection to postpone the
sale date may be exercised only once.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081