NEW LAW SEEKS TO AVOID FORECLOSURES

            Seeking to encourage workouts rather than foreclosures, the California Legislature passed Senate Bill No. 1137, effective September 8, 2008.  The bill substantially changes existing foreclosure law in a number of ways.

Delay and Discuss Before Foreclosure

            First, the law delays foreclosure and requires discussion.  Under existing law, the first step in a nonjudicial foreclosure is the filing of a “notice of default,” which can be filed immediately after a missed payment.  Now, a notice of default may not be filed until thirty (30) days after the lender contacts the borrower to “explore options …to avoid foreclosure.”  Civil Code Section 2923.5. 

            A lender must comply with specific rules.  CC 2923.5(g).  A letter must be sent, with a toll-free telephone number to find a HUD-certified counseling agency.  CC 2923.5(g)(1).  The lender must make three attempts to call the borrower, at different times and on different days.  Automated dialing machines may be used, but, if the borrower answers, a live representative must speak.  CC 2923.5(g)(2).  If the borrower does not respond in two weeks, the lender must send a certified letter.  CC 2923.5(g)(3). 

            The lender or its agent must provide “a means for the borrower to contact it in a timely manner, including a toll-free telephone number that will provide access to a live representative during business hours.”  CC 2923.5(g)(4).   In our opinion, this provision is important and useful; we have had clients spend days trying to telephone their lender, who never got through.   Finally, CC 2923.5(g)(5) gives a detailed listing of what information the lender must post prominently on its website.  

            None of these rules apply if: (1) the borrower has surrendered the property; (2) the borrower has contracted with a business whose primary business is assisting lenders who have decided to abandon their homes how to drag out the process; and (3) the borrower has filed for bankruptcy.  CC 2923.5(h).

Encourage Workouts; Can Unreasonable Lenders Be Sued?

            Workouts often make good economic sense.  Nonetheless, borrowers often refuse to discuss them.  Civil Code Section 2923.6 tries to change this.

In the typical situation, the mortgage is for more than the house is worth.  If the lender forecloses, it gets only the value of the house, minus the delay, expense and aggravation of foreclosure.  The lender can thus often make more money, long term, if it agrees to reduce the loan amount to a level the borrower can pay.  Lenders often refuse to consider this, however, because they see it as their duty to be “tough.”

            CC 2923.6 tries to change this logic. It seeks to do this, in an elaborate and indirect way.  First, it provides that “any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties…”  Second, it provides “that a servicer acts in the best interests of all parties” if it agrees to modify a troubled loan in such a way that the anticipated long term recovery is greater than that would be obtained in foreclosure.

            What does this mean?  The obvious intent of the law is to shield loan servicing agents who are sued by their clients for being reasonable to borrowers.

            Is the law also a sword?  Can borrowers sue lenders or their agents, if they refuse to be reasonable?  The law does not say.    Expect to see a borrower’s lawyer make this argument soon, and for the loser to take the issue up to the Court of Appeal.

Protect Tenants in Foreclosed Properties

            Gibson Law has had many clients approach us recently with the following situation.  The client leases a house, and has paid rent regularly.  The homeowner, however, has not used the rent to pay the mortgage, so the property is being foreclosed upon.  What are the tenant’s rights when foreclosure occurs?

            Subject to some odd exceptions, under current law the new owner can evict a tenant from a foreclosed property after being thirty days notice.  Newly enacted Civil Code Section 2924.8 gives tenants two new protections.  First, the tenant must be given notice of the foreclosure sale, via posting on the property.  Second, the thirty day notice period before eviction is increased to sixty days.  Code of Civil Procedure Section 1161b. 

Foreclosed Properties Must Be Maintained; $1,000 a Day Fines

            Foreclosures often reduce property values, both by the foreclosure process itself and because the new owner (who is often an institution rather than a family wishing to live in the home) fails to maintain the property.  Civil Code Section 2923.6 provides that properties obtained in foreclosure must be maintained.  “Maintaining” a property is defined as failing to care for the exterior of the property, including failing to cut the grass and other plans, failing to evict trespassers or squatters, and permitting mosquito larvae to grow in standing water.  Violators of this law may be fined up to $1,000 a day by local government agencies. 

Limitations on Application of Law

            Most of the new law applies only to residential mortgage loans made between January 1, 2003 and December 31, 2007.  The law expires on January 1, 2013, unless it is extended.