New Laws in Foreclosure – California Foreclosure Prevention Act

BUSINESS ALERT

CURRENT LEGAL ISSUES FOR THE BUSINESS COMMUNITY

October, 2010        No. 3

New Laws in Foreclosure – California Foreclosure Prevention Act

By: Harriet B. Alexson

(714.384.6578)

© 2010. All Rights Reserved.

Assembly Bill No. 7 will affect specified loans recorded between Jan 1, 2003 and Jan 1, 2008 by prohibiting a mortgagee, trustee, or other authorized person to take sale from giving a notice of sale for an additional 90 days if said loan is the first mortgage or deed of trust that the property secures, if the borrower occupied the property as his/her principal residence when the loan became delinquent, and if the notice of default has been filed.

This bill was established with the belief that it will alleviate the deleterious effects of California’s economy resulting from the alarmingly high rate of foreclosures currently prevalent in our state. Modifying the foreclosure process is a necessary and essential step toward effective damage control. Thus, additional time for borrowers will be granted under this law to work out loan modifications while simultaneously providing an exemption for the mortgage loan servicers implementing the loan modification programs. Slowing the foreclosure process and providing an increasing ability to modify loans will, theoretically, assist in stabilizing our state’s economy.

An additional 90 days shall be granted before the mortgagee, trustee, or other person authorized to take sale gives notice of sale if the following conditions exist for parties to pursue a loan modification:

1.    Loan was recorded between Jan 1, 2003 and Jan 1, 2008 and is secured by a residential property.

2.    The loan is the first mortgage or deed of trust that the property secures.

3.    The property was the borrower’s principal residence when the loan became delinquent.

4.    Notice of default on the property has been recorded.

** NOTE: This section does not apply if loans were made, purchased, or serviced by a CA state or public local housing agency or authority or for loans that are collateral for securities purchased by said agencies.

A comprehensive loan modification program shall have the following features:

1. Anticipated recovery of the workout plan exceeds the anticipated recovery of the foreclosure process on a net value basis of the residence.
2. Loan modification program targets a ratio of borrower’s housing-related debt to gross income of 38% or less, on an aggregate basis.
3. Includes a combination of the following:a.    Fixed interest rate reduction term of 5 yearsb.    Amortization period extension to no more than 40yrs of the original loanc.    Deferral of some portion of the principal amount of unpaid principal balance until maturity of the loand.    Reduction of principale.    Compliance with federal mandates

   f.    Other factors that the commissioner determines appropriate.

4.  Servicer must seek to achieve long-term sustainability for the borrower through the loan modification.

Mortgage loan modifications, with the approval of the Commissioner, can be granted exemption from the aforementioned requirements. This process is to take the commissioner 30 days or less. If said applications are denied, revised applications for the loans can then be sent, which are then subject to be approved or denied again. The Secretary of Business, Transportation, and Housing shall maintain a publicly available list disclosing final orders granting exceptions on their website.

Commissioners include any of the following:

1. Commissioner of Corporations for mortgage lenders and servicers, finance lenders, and brokers servicing mortgage loans. This also includes any other entities servicing mortgage loans.
2. Commissioner of Financial Institutions for commercial and industrial banks, savings associations, and credit unions organized that serve mortgage loans.
3. Real Estate Commissioner for licensed real estate brokers.The conditions set forth for loan modifications do not apply if any of the following occurs:

1. Borrower has surrendered the property either by delivering a letter or keys to property owner.
2. Borrower has contracted with an organization, person, or entity whose business is to advise people on how to extend/avoid the foreclosure process
3. Borrower has filed for bankruptcy and the bankruptcy court has not entered an order closing or dismissing the case or granting relief from a stay of foreclosure.
4. This section shall be in effect only until Jan 1, 2011 and is then repealed unless extended or deleted before that date.