New California Foreclosure Law
On September 28, 2020 Senate Bill 1079 was passed by the California Senate and signed into law by the Governor. The new law, scheduled to go into effect 01/01/2021 significantly changes the rules that govern the way 1-4 Unit properties are sold at a Non-judicial Foreclosure Trustee Sale, and also significantly increases the fines that cities and counties can charge purchasers at the sale if the property is not maintained.
In the past (and through the end of this year) the highest bidder at the Trustee sale was the new owner of the property, subject to any senior loans, liens and of course taxes. The purchaser provided certified funds to the auctioneer, the checks were deposited by the Trustee and a Trustees Deed Upon Sale was then sent to the purchaser so they could record the document with the County Recorder. Recording the Trustees Deed Upon Sale within 15 days of the sale perfected the sale as of 8 am on the actual date of the auction.
As of Jan 01, 2021 if anyone other than an "owner occupant" is the high bidder at the Trustee sale, the sale is not finalized; other "Eligible Bidders" have 15 days to send the Trustee a "letter of intent to bid" on the property, and have up to 45 days after the initial sale to deliver certified funds to the Trustee. The funds sent must either match or exceed the price paid at the Trustee sale.
An "Eligible Bidder" is defined in section 2924(m) as any of the following:
1)An eligible tenant buyer: a natural person who at the time of the Trustee sale:
(A) Is occupying the real property as their primary residence.
(B) Is occupying the real property under a rental or lease agreement entered into as the result of an arm’s length transaction with the mortgagor or trustor on a date prior to the recording of the Notice of Default against the property.
(C) Is not the mortgagor or trustor, or the child, spouse, or parent of the mortgagor or trustor.
2)A prospective owner-occupant: a natural person who presents to the Trustee a affidavit that:
(A) They will occupy the property as their primary residence within 60 days of the trustee’s deed being recorded.
(B) They will maintain their occupancy for at least one year.
(C) They are not the mortgagor or trustor, or the child, spouse, or parent of the mortgagor or trustor.
(D) They are not acting as the agent of any other person or entity in purchasing the real property.
3)A nonprofit association, nonprofit corporation, or cooperative corporation in which an eligible tenant buyer or a prospective owner-occupant is a voting member or director.
4)An eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing.
5)A limited partnership in which the managing general partner is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable housing.
6)A limited liability company in which the managing member is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing.
7)A community land trust, as defined in clause (ii) of subparagraph (C) of paragraph (11) of subdivision (a) of Section 402.1 of the Revenue and Taxation Code.
8)A limited-equity housing cooperative as defined in Section 817.
9)The state, the Regents of the University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state.
One of the many issues with this bill is when the transfer of title will be perfected. After 1/1/21 a Trustees Deed Upon Sale must be recorded either 18 days after the sale (if an Owner Occupant has not purchased the property at the initial sale, waiting to see if the Trustee receives any letters of intent to bid) or, if letters are received, 48 days after the sale date. As in the prior code, the sale is perfected as of 8 am on the day of the original auction.
The issues evident at first glance:
1) If a property is purchased at the Trustee sale by an investor, they will have to wait 15 days before they know if they are the owners of the property.
2) If a letter of intent is delivered to the Trustee within the initial 15 days, they will then have to wait a full 45 days from the original sale date (with the Trustee holding their funds the entire time) before they know if someone actually submits funds to purchase the property. There is no requirement that parties follow through with their letter of intent with funds to purchase the property.
3) During this time period, no-one really "owns" the property; the person who ultimately wins the bid per the new rules will have perfected title as of the original auction date yet has no control over it during that period.
4) Dropped opening bids are going to be far less common as even though no-one may purchase the property at the Trustee sale, eligible bidders" can submit a letter and buy the property for that lower price.
In addition to these changes to the rules governing Trustee Sales, this bill also amends section 2923.3 by increasing the penalties Cities and Counties may charge owners of properties purchased in Foreclosure for failure to maintain the property. I won’t go into the minutia of the code, but basically if the property owner does not respond to corrective request letters sent by the City/County within 14 business days, the penalties they are allowed to charge increase to $2,000 per day for the first 30 days of non-compliance, and $5,000 per day thereafter.
The "intent" of the bill was to give owner occupants a chance to buy properties going to foreclosure sale and prevent large corporations from buying up a majority of the properties, as they believed happened after the last real estate downturn, and also to prevent bundling of properties from being sold. The truth is I don’t believe the "large corporations" bought a majority of the homes going to sale, and the "bundling" they were referring to happened after the properties reverted to the foreclosing lender, not during the Non-Judicial foreclosure sale.
Ultimately, whoever ends up buying these properties will have to be all cash buyers, which preclude the vast majority of owner occupant or tenant buyers. I also don’t believe there are any viable financing alternatives to these buyers, as they will need cahiers checks to submit before they even know if they won the bid, and if they do they will receive a Trustees Deed Upon Sale which carries no warranties of clear title or property condition upon transfer. Buying at the Trustee Sale requires a lot of research and due diligence, and liquid cash. It remains to be seen how many of the "eligible buyers" identified in the bill will be willing to make that commitment to this market.
Once again, excessive regulation will make it worse for the people to buy at the Trustee sales, as it adds on another layer of risk, which will squash bidding and thus ultimately create a lot more REO’s.
For more information, feel free to contact us anytime.