BILL ANALYSIS �
AB 1745
Page 1
Date of Hearing: April 30, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 1745 (Torres) - As Amended: March 29, 2012
SUBJECT : Mortgages: notices of sale.
SUMMARY : Prohibits the filing of a notice of sale (NOS) if a
mortgagee, trustee, beneficiary of authorized agent has provided a
written approval of a short sale. Specifically, this bill :
1)Defines "short sale" as a transfer in which the trustor or
mortgagor sells a property for a price less than the remaining
amount of the indebtedness secured by the property at the time
of sale.
2)Allows approval of a short sale to be withdrawn by the
mortgagee, trustee, beneficiary, or authorized agent at any time
if an underlying condition upon which approval was initially
granted has changed.
3)Provides that, not less than three days prior to the withdrawal
of approval, written notice shall be provided to the short sale
seller and shall include an explanation of the change of
condition that caused the withdrawal.
EXISTING LAW generally regulates mortgages and deeds of trust,
including, among other things, recording mortgages and deeds of
trust, disclosures in connection with mortgages and deeds of
trust, and foreclosure procedures for mortgages and deeds of
trust. (Civil Code section 2920 et seq.)
FISCAL EFFECT : None
COMMENTS :
AB 1745 seeks to remedy a problem related to short sale agreements
in which a bank withdraws from a short sale agreement and
continues the foreclosure process without informing the borrower.
A short sale is simply a situation where a borrower negotiates to
sell their property to a subsequent buyer for less than the
outstanding balance remaining on the loan. In order for a short
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sale to work, the holder of the indebtedness must agree to accept
less than the remaining loan balance from a second buyer. The
advantage for the bank is that a short sale prevents a home from
going into the foreclosure and potentially being left vacant for
an extended period. Additionally, usually the short sale price
for a home exceeds what that same property would get in a
foreclosure sale. For the borrower, a short sale allows them to
extricate themselves from a home without facing the destructive
consequences, both socially and financially, that come from a
foreclosure.
While a bank may agree initially to a short sale, many factors can
lead to a collapse of the short sale agreement. Many buyers walk
away from the deal due to long delays from banks as initial offer
acceptance may not always be immediately forthcoming, and
subsequent negotiations take weeks and sometimes months. Another
factor that complicates short sales is the existence of a second
mortgage holder. A large proportion of mortgages originated over
the last decade include a second mortgage. In the event of
foreclosure the second lien holder is more than likely to face a
complete loss of their interest in the property as the value of
the property is no longer equal to the total loan outstanding. In
the priority of liens, the first lien holder, the primary mortgage
holder, gets first take on any proceeds from the foreclosure sale.
Due to low property values, a short sale is also likely to
eliminate any value for the second lien holder. This creates an
additional obstacle as second lien holders can refuse a short
sale, and prevent the entire transaction. Some of these refusals
on the part of second lien holders have occurred even when the
second lien holder is offered some compensation. According to a
California Association of Realtors member survey, 60% of short
sale offers failed to result in a closed sale in 2011.
The Making Home Affordable (MHA) program, the centerpiece of the
federal government's foreclosure response (announced in March of
2009), includes guidelines for eligible mortgages concerning the
use of short sales as a loan modification alternative when a
borrower does not qualify for a modification. This part of the
MHA program is included under the Home Affordable Foreclosure
Alternatives (HAFA) program. HAFA attempts to streamline the
short sale process for loans serviced on behalf of Fannie Mae and
Freddie Mac (Government Sponsored Entities) and in cases when the
borrower has already been considered for a loan modification. In
spite of efforts to standardize and streamline short sales under
the HAFA program, it too has suffered from the same problems
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plaguing the larger short sale market. In response, the Federal
Housing Finance Agency (FHFA), the acting conservator and
oversight agency for the GSEs, recently announced new rules
regarding short sales for GSE serviced loans. These new rules,
going into effect June 1, 2012, require lenders to respond to
short sale requests within 30 days and make final a decision
within 60 days.
On April 6th, a federal judge signed-off on the $25-billion
foreclosure settlement, first announced in February of 2012,
between banks (Citi, Wells Fargo, Bank of America, Chase and
Ally), federal agencies, and the state attorneys general from 49
states and the District of Columbia. The investigation began in
October of 2010 as media stories highlighted widespread
allegations regarding the use of "robo-signed" documents used in
foreclosure proceedings around the country. The attorneys general
formed working groups to investigate the widespread allegations,
however, further investigation led to a larger discussion with the
five largest mortgage loan servicers regarding various facets of
the foreclosure and loan modification process. While conducting
their investigation the attorneys general identified deceptive
practices regarding loan modifications, foreclosures occurring due
to the servicer's failure to properly process paperwork, and the
use of incomplete paperwork to process foreclosures in both
judicial and non-judicial foreclosure cases.
The mortgage settlement provides for various changes to the
foreclosure and loan modification processes of the signatory
institutions. The provisions of the settlement that address short
sales are contained in two sections within Exhibit A of the
settlement documents.
The settlement provides that a foreclosure sale cannot proceed if
a borrower has been approved for a short sale. Additionally, page
30-31 of Exhibit A provides for the following guidelines relating
to short sales:
1)Servicer shall make publicly available information on general
requirements for the short sale process.
2)Servicer shall consider appropriate monetary incentives to
underwater borrowers to facilitate short sale options.
3)Servicer shall develop a cooperative short sale process which
allows the borrower the opportunity to engage with servicer to
pursue a short sale evaluation prior to putting home on the
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market.
4)Servicer shall send written confirmation of the borrower's first
request for a short sale to the borrower or his or her agent
within 10 business days of receipt of the request and proper
written authorization from the borrower allowing servicer to
communicate with the borrower's agent.
5)The confirmation shall include basic information about the short
sale process and servicer's
requirements, and will state clearly and conspicuously that the
servicer may demand a deficiency payment if such deficiency
claim is permitted by applicable law.
6)Servicer shall send borrower at borrower's address of record or
to borrower's agent timely written notice of any missing
required documents for consideration of short sale within 30
days of receiving borrower's request for a short sale.
7)Servicer shall review the short sale request submitted by
borrower and communicate the disposition of borrower's request
no later than 30 days after receipt of all required information
and third party consents.
8)If the short sale request is accepted, servicer shall
contemporaneously notify the borrower whether servicer or
investor will demand a deficiency payment or related cash
contribution and the approximate amount of that deficiency, if
such deficiency obligation is permitted by applicable law. If
the short sale request is denied, servicer shall provide reasons
for the denial in the written notice. If Servicer waives a
deficiency claim, it shall not sell or transfer such claim to a
third-party debt collector or debt buyer for collection.
Clarification needed .
AB 1745 provides that the approval of the short sale may be
withdrawn if "an underlying condition" upon which the approval was
initially granted has changed. This language is somewhat vague
and would be serviced by greater clarification and precision.
Therefore staff recommends the following amendment:
Approval of a short sale may be withdrawn by the mortgagee,
trustee, beneficiary, or authorized agent at any time if the
terms of the short sale agreement have an underlying condition
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upon which approval was initially granted has changed. Not less
than three days prior to the withdrawal of approval, written
notice shall be provided to the short sale seller and shall
include an explanation of the change of condition that caused
the withdrawal.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of REALTORS - Sponsor
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081