BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 4 (Calderon and Vargas)
As Amended April 7, 2011
Hearing Date: April 26, 2011
Fiscal: No
Urgency: No
BCP:jg
SUBJECT
Mortgages
DESCRIPTION
This bill would require, on and after April 1, 2012, that a
notice of non-judicial foreclosure sale contain: (1) language
notifying potential bidders of specified risks involved in
bidding on the property; and (2) a notice to the property owner
informing the owner about how to obtain information regarding
any postponement of the sale.
This bill would additionally require a trustee handling the
foreclosure to make a good faith effort to provide up-to-date
information regarding sale dates and postponements, as
specified.
BACKGROUND
Foreclosures in California are generally non-judicial, meaning
that they are accomplished without court involvement. The first
step in the foreclosure process is the filing of a Notice of
Default, which generally occurs after three or more months of
delinquency. The foreclosing entity must then generally wait at
least three months before noticing the sale of the property,
which must be posted, published, and filed with the county
recorder. The sale date contained in the Notice of Sale may be
postponed by public proclamation (given at the time and date of
sale) for a total of up to 365 days. If the property is
actually sold at auction to the highest bidder, that bidder is
generally required to pay in cash or check, and takes the
property subject to any outstanding senior liens.
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This bill seeks to address two different issues that have arisen
regarding foreclosure sales by inserting two separate
disclosures into the Notice of Sale. First, this bill would
inform homeowners that their sale date may be postponed, give
them information on how to receive updated information about
that sale, and impose new duties on trustees consistent with
that disclosure. Second, this bill would inform a bidder that
placing the highest bid does not automatically entitle him or
her to clear ownership of the property.
CHANGES TO EXISTING LAW
Existing law regulates the non-judicial foreclosure of
properties pursuant to the power of sale contained within a
mortgage contract. To commence the process, existing law
authorizes the trustee, mortgagee, or beneficiary to record a
Notice of Default and generally requires three months to lapse
before noticing the sale of the property. (Civ. Code Secs. 2924,
2924f.)
Existing law requires the Notice of Sale to be posted,
published, and filed with the county recorder at least 20 days
before the sale of the property. (Civ. Code Sec. 2924f.)
Existing law governs the manner in which the sale must be
conducted and permits the sale to be postponed at any time prior
to completion of the sale. Any postponements may not exceed a
total of 365 days from the date set forth in the Notice of Sale.
If the sale is postponed for a total of more than 365 days, the
sale must be re-noticed. (Civ. Code Sec. 2924g.)
Existing law requires notice of each postponement and the reason
therefore to be given by public declaration by the trustee at
the time and place last appointed for sale. That declaration
must set forth the new date, time, and place of sale, as
specified. (Civ. Code Sec. 2924g(d).)
This bill would, on and after April 1, 2012, require the notice
of sale to contain substantially the following language if the
property is between one and four single-family residences:
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. Placing the
highest bid at a trustee auction does not automatically
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entitle you to free and clear ownership of the property. If
you are the highest bidder at the auction, you are or may be
responsible for paying off all liens senior to the lien
being auctioned off, before you can receive clear title to
the property. You should also be aware that the lien being
auctioned off may be a junior lien. 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.
NOTICE TO PROPERTY OWNER: The sale date shown on this notice
of sale may be postponed one or more times by the mortgagee,
beneficiary, trustee, or a court, pursuant to Section 2924g
of the California Civil Code. The law requires that
information about trustee sale postponements be made
available to the public, as a courtesy to those not present
at the sale. If you wish to learn whether your sale date has
been postponed, and, if applicable, the rescheduled time and
date for the sale of this property, you may call �telephone
number for information regarding the trustee's sale] or
visit this Internet Web site �Internet Web site address for
information regarding the sale of this property], using the
file number assigned to this case �case file number].
Information about postponements that are very short in
duration or that occur close in time to the scheduled sale
may not immediately be reflected in the telephone
information or on the Internet Web site. The best way to
verify postponement information is to attend the scheduled
sale.
This bill would provide that nothing in the above disclosures is
intended to modify or create substantive rights or obligations
for any person providing, or specified in, either of the
required notices.
This bill would require the mortgagee, beneficiary, trustee, or
authorized agent to make a good faith effort to provide
up-to-date information regarding sale dates to persons who
request that information, and to make that information available
free of charge. That information may be made available via an
Internet Web site, phone recording, or any other means that
allows 24 hour a day access, as specified; disruption of those
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methods for reasonable maintenance or due to a service outage is
not deemed to be a violation of the good faith standard.
This bill would provide that failure to comply with the above
provisions shall not invalidate any sale that would otherwise be
valid, and that the information required to be provided above
does not constitute the public declaration required to postpone
a trustee sale.
COMMENT
1. Stated need for the bill
According to the author:
Most residential real property foreclosures in California
are conducted nonjudicially, using a process set forth in
the Civil Code (Civil Code Sections 2924 et seq.) Although
the nonjudicial foreclosure rules are very precisely
described in law and have been clarified many times by the
courts, the process can be quite confusing to the
uninitiated. Two groups in particular -- homeowners who
have received a notice of trustee sale and individuals who
bid at a trustee sale, hoping to acquire a good deal on
residential real property - are particularly at risk, both
emotionally and financially, if they fail to thoroughly
understand the key rules that govern their situations.
Two of the most common sources of confusion among these
groups involve: 1) the rules for postponing foreclosure
sales; and 2) the obligations of a bidder who places the
high bid at a foreclosure sale.
. . .
SB 4 adds two informative paragraphs to the Notice of
Trustee Sale, a document which must be provided to
homeowners, filed with a county recorder, posted in a public
place, and published in a newspaper of general circulation,
before a home may be sold at foreclosure. These informative
paragraphs - one intended for homeowners facing the sale of
their home, and the other intended for potential bidders at
the foreclosure sale - are designed to help alleviate some
of the most common sources of confusion experienced by
homeowners and bidders, regarding the non-judicial
foreclosure sale process.
The United Trustees Association, in support, states that their
members "support the bill because it provides greater
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information on the foreclosure process, which can be
mystifying to those not conversant with it."
2. Informing homeowners of the new sale date
For homeowners in foreclosure, the trustee sale represents the
conclusion of the non-judicial foreclosure process and the time
at which ownership of the home is officially transferred to
another party. After the home is sold, the former homeowner no
longer has the legal right to remain in the residence and may be
evicted by the new owner. The issue that arises for many
homeowners facing the potential sale of their home is that they
do not know whether the house was sold on the noticed date, or,
if the sale date was continued. The homeowner does receive the
Notice of Sale that states the proposed date and time of the
sale, but that initial sale date is frequently postponed by the
trustee or foreclosing financial institution. When those sales
are postponed, the trustee must give a public declaration of
postponement at the time and place at which the sale was to
occur, and set forth the new date, time, and place of sale.
Existing law does not require the Notice of Sale to be renoticed
(mailed to the homeowner) unless the sale has been postponed for
at least 365 days.
Since homeowners rarely attend the foreclosure sale of their
home and, as a result, are not aware of the public declaration,
the author's office notes that it is extremely common for
property owners to be caught by surprise when their home is sold
months after they receive the Notice of Sale. For example: a
homeowner could have asked for a continuance of the sale date in
order to receive more time to complete a short sale, or the
financial institution could have continued the sale to ensure
that the necessary documents were in order before proceeding.
If the sale is continued multiple times, the owner could easily
lose track of the next sale date and, at some unknown time in
the future when the trustee or foreclosing institution elects
not to postpone the sale, the home could be sold unbeknownst to
the homeowner. The author also notes that:
Most homeowners who receive Notices of Sale in the mail are
unaware of the postponement rules. If a few days pass,
following the sale date and time listed in their notice of
sale, and there is no knock on the door from someone with an
official-looking piece of paper, ordering them to leave
their home, most homeowners breathe a sigh of relief, and
believe that they have avoided the loss of their home. They
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are often unaware that the date and time of their
foreclosure sale was merely postponed, and equally unaware
how they might learn when that new sale date and time have
been scheduled.
This bill seeks to address the above issues by including a
disclosure in the Notice of Sale that informs the homeowner
that: (1) the sale date may be postponed; (2) information
about postponements must be made available to the public; and
(3) the owner may call a telephone number listed in the
notice, or visit a specified Internet Web site, to receive
more information. To help ensure that accurate information is
available to the homeowner, the bill would require the trustee
(or mortgagee, beneficiary, or authorized agent) to make a
good faith effort to provide up-to-date information regarding
sale date and postponements. That information must be
available free of charge, and may be made available on an
Internet Web site, 24-hour telephone recording, or other means
that provides 24 hour a day, seven day a week no cost access
to the information.
Staff notes that while the above disclosure would appear to
help homeowners who would otherwise be unaware of the sale
date of their home, the best way for a homeowner to receive
that information would be to attend the noticed sale. The
proposed notice seeks to convey that fact to homeowners
clearly stating: "The best way to verify postponement
information is to attend the scheduled sale."
3. Notice to potential bidders regarding senior liens
For individuals who seek to buy properties at trustee sale
(non-judicial foreclosure) auctions, the auction offers the
potential for getting a good "deal" on a home, but carries
significant risks if the bidder has not done extensive research
on the property. Although bidders may look at the home and the
neighborhood, it is essential for them to also do a title search
on the property to see if there are any senior liens that are
not going to be wiped out by the foreclosure sale. (Liens
junior to the foreclosing lien are removed as a result of the
foreclosure sale, but senior liens remain intact.) If the
bidder purchases a home subject to a senior lien, the bidder
must satisfy that senior lien or face foreclosure of their
interest by that lien. The author notes that:
Most individuals understand that they must come to an
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auction, prepared to pay cash or bring cashier's checks in
the full amount they bid. However, unsophisticated bidders
incorrectly believe that their "winning" bid entitles them
to free and clear ownership of the property that is the
subject of the sale; these bidders are often unaware that,
under the law, their "winning" bid entitles them only to
whatever interest in the property was held by the
foreclosing beneficiary.
The implications of purchasing whatever interest in the
property was held by the foreclosing beneficiary are
particularly important, when the note being foreclosed upon
is junior to other recorded liens on the property. In a few
recent instances, a lender foreclosed on a junior lien, and
an unwitting bidder purchased that junior lien at the
foreclosure sale, only to learn that they were now
responsible for satisfying the outstanding, senior lien(s)
on the property, before they could take clear title. In
both known instances, neither "winning" bidder was able to
afford to pay off the outstanding senior lien(s) against the
property, and both ended up losing all of the money -
several hundred thousand dollars - that they had bid at the
foreclosure sale.
This bill seeks to warn bidders of the risks associated with
bidding on the property by adding a disclosure to the Notice of
Sale which informs the bidder that: (1) placing the highest bid
doesn't entitle the bidder to free and clear ownership; (2)
highest bidders may be responsible for paying off senior liens
in order to receive clear title; (3) the bidder is encouraged to
investigate the existence, priority, and size of outstanding
liens that may exist; and (4) the same lender may hold more than
one mortgage or deed of trust on the property. The proposed
disclosures appear to be common-sense precautions that a
potential bidder should take before attempting to purchase a
property at a foreclosure sale. From a policy standpoint, it is
preferable for a home to be sold at auction to an individual for
his or her primary residence as opposed to going back to the
financial institution and remaining vacant for a significant
period of time.
It should also be noted that while the pitfalls this bill seeks
to warn bidders of are legal, it is unfortunate that a lender
who holds both a first and a second mortgage would foreclose on
the second instead of the first - any bidder who purchases the
second would be on the hook to pay off a potentially significant
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lien on the property. Essentially, that lender would receive
the money paid by the bidder at the sale and still have the
potential to take the property back, once again, by foreclosing
on their senior lien. As an example of that exact situation
(which this bill seeks to warn potential bidders of), the San
Francisco Chronicle's August 2, 2010 article, Winning bid on
mortgage buys family heartache, 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."
Wells Fargo, which owns Wachovia, said in a statement: "We
believe the foreclosure auction of the property on which the
Strand family bid was done correctly, and are confident the
legal resolution to this matter will bear that out."
Support : California Bankers Association; United Trustees
Association
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : None Known
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