BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2347 (Feuer)
As Amended May 28, 2010
Hearing Date: June 29, 2010
Fiscal: No
Urgency: No
BCP:jd
SUBJECT
Mortgage Defaults: Secondary Public Financing
DESCRIPTION
This bill would permit a public entity to postpone a foreclosure
by up to 60 days if the property at issue contains five or more
multifamily units and the public entity is a party to a
regulatory agreement or a recorded deed restriction for the
property, as specified
(This analysis reflects author's amendments to be offered in
Committee.)
BACKGROUND
California is currently in the grip of a severe housing
downturn, which has been driven by historically high rates of
mortgage defaults and foreclosures. In the past three years,
over 1.2 million California homeowners have received notices of
default from their lenders. Over half a million California
homes have been foreclosed upon. Housing values across the
state have plummeted, and areas hardest hit by foreclosure have
become blighted with vacant, uncared for homes.
Foreclosures in California are generally non-judicial, meaning
that they are accomplished without court involvement. In order
to initiate a nonjudicial foreclosure, the foreclosing entity
must first file a Notice of Default (NOD). Although there is no
requirement regarding the timing of an NOD, most beneficiaries
usually wait at least three months following a borrower's
delinquency before moving forward to record an NOD. State law
(more)
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requires the foreclosing entity to wait at least three months
after filing an NOD, before it may move forward with a Notice of
Sale. The law requires a notice of nonjudicial foreclosure sale
to be officially noticed in a newspaper of general circulation,
posted on the property, and recorded at least 20 days before the
date of sale.
While much of the attention has been on single-family homes that
have been lost to foreclosure, multifamily properties also may
be at risk due to the economic downturn. When those properties
enter into the foreclosure process, the courts typically appoint
a receiver to evaluate and report on various aspects of the
property. Those reports typically take at least 60 days to
prepare. If a public agency holds an interest in the property
as a result of providing prior financial assistance to ensure
that a portion of the property is set-aside as low income, that
agency may then evaluate that report to determine whether or not
to step in and preserve the affordable housing units. Due to
staff and resource limitations, those public agencies may only
focus on a property (and associated report) after the Notice of
Sale has been file as that action demonstrates that the sale of
the property may be imminent and that efforts to avoid a
foreclosure were likely unsuccessful.
To allow additional time for evaluation of these properties,
this bill seeks to allow the public agency to postpone the sale
date for up to 60 days, as specified. The proposed author's
amendments would create a 180-day "wall" - after that timeframe,
any postponement would expire.
CHANGES TO EXISTING LAW
Existing law regulates the nonjudicial 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 an NOD and allow
three months to lapse before setting a date for sale of the
property. (Civ. Code Sec. 2924.)
Existing law requires a notice of nonjudicial foreclosure sale
to be officially noticed in a newspaper of general circulation,
posted on the property, and recorded at least 20 days before the
sale date. (Civ. Code Sec. 2924f.)
This bill would provide that if a property contains five or more
multifamily units and a public entity is a party to a regulatory
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agreement or a recorded deed restriction on the property, a
public entity may, by written notice to the trustee, postpone
the sale date by no more than 60 days.
This bill would state that such written notice must be provided
to the trustee at least 72 hours prior to the scheduled sale
date, through certified or registered mail, guaranteed or
overnight delivery service, or personal delivery. That written
notice shall contain a certification from the public entity that
it has the authority to postpone the sale date pursuant to the
above authority, and the trustee may rely upon that
representation.
This bill would provide that if multiple public entities are
parties to a regulatory agreement or a recorded deed restriction
on a property, only one entity may postpone the sale, and state
that the power to postpone the sale may be exercised only once.
This bill would limit the above postponing of the sale date as
follows:
A public entity may not exercise the above authority if
more than 180 days have elapsed since filing the notice of
default.
Any period of postponement, which occurs based on a
public entity's exercise of their authority expires after
180 days have elapsed since the filing of the notice of
default.
This bill would clarify that the above limitations shall not be
deemed to require a mortgagee, beneficiary, trustee, or
authorized agent to file a notice of sale, once more than 180
days has elapsed since filing of the notice of default, and,
that the filing of a bankruptcy case shall not act to toll the
above 180 day limitation.
This bill would also define "public entity," "recorded deed
restriction," and "regulatory agreement."
This bill would sunset the above provisions on January 1, 2013.
COMMENT
1. Stated need for the bill
According to the author,
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Public agencies, typically city or county housing
departments, 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. The affordability
agreements are usually subordinated to private lenders. If
the owner defaults on the private loan and a foreclosure
ensures, the public agency's investment and affordability
conditions are wiped out.
In a multifamily foreclosure, a receiver is typically
appointed to evaluate and report on the property's
operations and financial condition. A public agency with
subordinated interest in the property uses the receiver's
report to conduct an economic analysis. The analysis is the
basis for a locality's action plan for the property.
Typically the local legislative body must meet in order to
review and approve the plan of action. Because local
housing agencies are responsible for prudently managing
limited public finances - and are constrained by limited
human resources, they typically do not begin to act upon the
receiver's report in detail and, if warranted, begin to seek
legislative (council or board) approval for acquiring the
property until a Notice of Sale is issued for the property.
The foreclosure process requires that a foreclosed
multi-family property be sold at a public auction.
Unfortunately, the amount of time between the Notice of Sale
being issued and the sale of the distressed property (such a
sale can happen as soon as 21 days after the Notice of Sale)
can make it very challenging for the agency to get a plan of
action approved by their governing body. . . . The bottom
line is that AB 2347 provides public entities a necessary
tool to preserve affordable housing units, while protecting
precious taxpayer dollars.
2. Compromise amendments and 180-day "wall"
In response to concerns of a coalition of financial
institutions, including the California Bankers Association,
California Financial Services Association, California
Independent Bankers, and California Mortgage Bankers
Association, and the California Land Title Association, the
author accepted amendments in the Senate Banking, Finance and
Insurance Committee to: (1) create a 180 "wall" for the
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postponement; (2) clarify that a bankruptcy filing does not
affect the "wall;" and (3) added a sunset of January 1, 2013.
The amendments would also clarify the process by which the
trustee is notified of a request for postponement.
a. 180-day "wall"
Under existing law, the foreclosure process commences with the
filing of a Notice of Default. After that filing, there is a
statutory three-month delay before a Notice of Sale can be
given - that Notice of Sale must occur at least 20 days before
the sale date. It should be noted that those are the
statutory minimum timeframes provided under existing law that,
in reality, the foreclosure process generally takes much
longer than the statutory minimum time of around 110 days.
To provide public entities with time to determine their plan
of action for properties where the entity is a party to a
regulatory agreement or a recorded deed restriction, the bill
would permit those entities to postpone that sale date for a
period of 60 days. As a result of that proposed delay, and
the unknown point in time at which a NOS may actually be
given, concerns arose regarding how long the foreclosure
process could be extended by the postponement. The idea of a
"wall" (essentially a point in time at which a postponement
could expire) was suggested by the opposition as a way to
address that issue - the concept of the 180-day "wall" was
accepted by the author in the Senate Banking, Finance and
Insurance Committee.
That 180-day "wall" would act to prevent a public entity from
requesting a postponement that goes more than 180 days past
the filing of the Notice of Default. For example, if the
postponement is requested on or before the 120th day, the
entity would have the benefit of the full 60-day postponement
period. If a postponement were requested 150 days into the
foreclosure process, the postponement would only last until
the 180th day (the wall). The entity would not be able to
request a postponement after the 180-day mark because they
would be past the "wall."
From a policy standpoint, that compromise would appear to
permit public entities with valuable time to make a decision
regarding the property at issue, while providing some
assurances of some finality in the foreclosure process. The
amendments expressly provide that nothing in the language
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implementing the "wall" shall be deemed to require the filing
of a Notice of Sale - that clarification is important to
ensure that lenders are not inadvertently forced to notice a
property for sale just because they are 180 days into the
foreclosure process.
b. Notice to trustee
Since the bill's provisions permit the delaying of a sale date
for up to 60 days - the question arises about how that delay
should be implemented. If a Notice of Sale has already been
given (meaning that the sale date is set for some time in the
near future), it is important to provide the trustee with
notice that the entity is exercising their rights under this
bill. To address that issue, the amendments would require the
public entity to provide written notice to the trustee at
least 72 hours prior to the scheduled sale date, through
certified or registered mail, guaranteed or overnight delivery
service, or personal delivery.
The amendments would also provide that the public entity must
certify in the written notice that it has the ability to
postpone the sale date, and would permit the trustee to rely
upon that representation. That language ensures that the
trustee has the authority to postpone the date upon receipt -
absent their ability to rely upon that notice, the trustee
could be left in limbo about whether the entity truly has the
ability to postpone the sale. It should be noted that
trustee's duties are generally ministerial, and that the
proposed language allows them to implement the postponement in
a manner consistent with the traditional ministerial nature of
their duties.
c. Sunset
The amendments would also add a sunset of January 1, 2013.
That date is consistent with other foreclosure measures, such
as SB 1137 (Perata, Corbett, Machado, Chapter 572, Statutes of
2008), which provided an end-point to the legislation.
3. Definitions of "recorded deed restriction" and "regulatory
agreement"
The above proposed 60-day postponement applies when a public
entity is a party to a regulatory agreement or a recorded deed
restriction on the property. This bill would define "recorded
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deed restriction" as a deed which specifies that all or a
portion of the property's usage is restricted to rental and
lower income households and identifies the number of units
restricted to use as low-income housing, and would define
"regulatory agreement" as an enforceable and verifiable
agreement with a public entity that has provided financing for
the acquisition, rehabilitation, construction, development, or
operation of low-income housing property that restricts all or a
portion of the property's usage for rental to lower income
households, as specified.
Western Center on Law & Poverty (WCLP) and the California Rural
Legal Assistance Foundation (CRLA), in support, note that these
agreements and deed restrictions ensure that the property
remains affordable to, and occupied by, lower-income or other
income-eligible households. Since the public agency will
usually subordinate its interest (becoming a junior lienholder),
WCLP and CRLA note that "trouble occurs when the owner is unable
to make the loan payments secured by the first trust deed. The
holder of the first forecloses, and under law, all subordinate
interests are wiped out. Hence, public dollars that were used
for the public purpose of providing affordable rental housing
assistance are lost, and the low-income tenants are displaced."
4. Author's amendment in mockup
Committee staff notes that the author's proposed mockup would:
(1) clarify the process for notifying the trustee of a request
for postponement; (2) add the 180-day wall discussed above; (3)
clarify that the filing of a bankruptcy action does not act to
toll the 180 day timeframe; and (4) add a sunset.
Committee staff further notes the proposed amendments are
intended to remove concerns of the opposition (a coalition of
trade associations). As of the writing of this analysis, staff
has not received any opposition to the proposed compromise
amendments.
Support : California Rural Legal Assistance Foundation; League
of California Cities; Western Center on Law & Poverty
Opposition : None Known
HISTORY
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Source : City of Los Angeles
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Judiciary Committee (Ayes 7, Noes 2)
Assembly Banking and Finance Committee (Ayes 8, Noes 1)
Assembly Floor (Ayes 50, Noes 25)
Senate Banking, Finance and Insurance Committee (Ayes 7, Noes 0)
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