The real estate industry demonstrated great strength in opposing the language in SB 681. With industry pushback, the bill did not pass.

However, the radical leftist Sacramento legislators found a way to push the same language through by attaching it to AB 130, which contains the state budget. This is a clever method of circumventing the real estate industry and the public, one that follows a Marxist ideology and undermines private enterprise.

AB-130 is a significant attack on private enterprise, as it eliminates or significantly impairs the possibility of obtaining a second trust deed on all residential property, whether owner-occupied or income-producing.

Remaining unanswered is how the lending industry will respond to this onerous law: Will institutional lenders, wall street securitizers, Fannie Mae, Freddy Mac, and private/hard money lenders exit this subset of lending, or will industry participants sue to obtain an injunction against enforcement, or will they attempt to make loans subject to the conditions of the new language in the law?

Article:

AB 130, signed into law in 2025, has a significant impact on the entire real estate lending industry by rendering the option of obtaining subordinated second trust deeds obsolete.

Subordinate Liens on residential real property.

There is no distinction between purchase money, seller carryback, equity second, or a line of credit, so long as the lien is subordinate and recorded on a residential piece of real estate.

2924. 13 of the California Civil Code:

(a) As used in this section:

(1) Borrower has the same meaning as defined in Section 2929. 5.

(2) Mortgage servicer includes the current mortgage servicer and any prior mortgage servicers.

(3) Subordinate mortgage means a security instrument in residential real property, including a deed of trust and any security instrument that functions in the form of a mortgage, that was, at the time it was recorded, subordinate to another security interest encumbering the same residential real property.

(b) The following conduct constitutes an unlawful practice in connection with a subordinate mortgage:

(1) The mortgage servicer did not provide the borrower with any written communication regarding the loan secured by the mortgage for at least three years.

(2) The mortgage servicer failed to provide a transfer of loan servicing notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Real Estate Settlement Procedures Act, as amended (12 U. S. C. Sec. 2601 et seq. ), and investor or guarantor requirements.

(3) The mortgage servicer failed to provide a transfer of loan ownership notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Truth in Lending Act, as amended (15 U. S. C. 1601, et seq. ), and investor or guarantor requirements.

(4) The mortgage servicer conducted or threatened to conduct a foreclosure sale after providing a form to the borrower indicating that the debt had been written off or discharged, including, but not limited to, an Internal Revenue Service Form 1099.

(5)The mortgage servicer conducted or threatened to conduct a foreclosure sale after the applicable statute of limitations expired.

(6) The mortgage servicer failed to provide a periodic account statement to the borrower when required to give that statement by law, including, but not limited to, the federal Truth in Lending Act, as amended (15 U. S. C. 1601, et seq. ), and investor or guarantor requirements.

(c) A mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent shall not conduct or threaten to conduct a nonjudicial foreclosure until the mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent does both of the following:

(1) Simultaneously with the recording of a notice of default, records or causes to be recorded, in the office of the county recorder of the county in which the encumbered property is located, a certification under penalty of perjury that either:

(A) The mortgage servicer did not engage in an unlawful practice as described in subdivision (b).

(B) The mortgage servicer lists all instances when it committed an unlawful practice as described in subdivision (b).

(2) Simultaneously with the service of a recorded notice of default, sends both of the following documents to the borrower by United States certified mail with return receipt requested to the last known mailing address of the borrower:

(A) A notice providing that if the borrower believes the mortgage servicer engaged in an unlawful practice described in subdivision (b) or misrepresented its compliance history, the borrower may petition the court for relief before the foreclosure sale.

(B) A copy of the certification recorded pursuant to paragraph (1).

(d) Upon a borrower's petition to the court for relief before the foreclosure sale, the court shall enjoin a proposed foreclosure sale pursuant to a power of sale in a subordinate mortgage until a final determination on the petition has been made.

(e) It shall be an affirmative defense in a judicial foreclosure proceeding if the court finds the mortgage servicer engaged in any of the unlawful practices specified in subdivision (b).

(f) The court may provide equitable remedies that the court deems appropriate, depending on the extent and severity of the mortgage servicer's violations. The equitable remedies may include, but are not limited to, striking all or a portion of the arrears claim, barring foreclosure, or permitting foreclosure subject to future compliance and a corrected arrearage claim.

(g) A borrower may also petition the court to set a nonjudicial foreclosure sale aside when a certification required by subdivision (c) was never recorded or when a certification recorded pursuant to subdivision (c) indicates that the mortgage servicer engaged in an unlawful practice described in subdivision (b) or misrepresented its compliance history.

(h) Any failure to comply with the provisions of this section shall not affect the validity of a trustee's sale or a sale in favor of a bona fide purchaser.

Comments on the effect of this new law:

The same remedies appear available to a defaulting borrower for both non-judicial and judicial foreclosure procedures.

At the very same time that a loan servicer wants to file a notice of default, they must also include an affidavit, under penalty of perjury, stating that they did not violate the law. This requirement adds complexity to the foreclosure process, as the instructions to the foreclosure trustee will now require an extra document.

The new law created a double negative, requiring the loan servicer to declare that they did not violate the law, thereby placing them in a defensive position from the outset.

This invites the defaulting borrower's lawyer to file a lawsuit against the loan servicer and, most likely, add the private beneficiaries to their complaint.

Expect many private investors to become advisory to the loan servicer, obtain their counsel, and cross-complain for indemnity.

The first negative is that the servicer will be accused of violating the law, and the defaulting borrower uses this as a stall tactic.

The second negative is that the loan servicer is required to pay for defending their innocence.

We can anticipate a significant amount of litigation to counter this bill as unconstitutional, preparing the industry for the legal battles that lie ahead. This heightened potential for litigation necessitates our vigilance and preparedness, ensuring we are ready to defend our industry's interests.

At best, the industry may secure an injunction against the application of this burdensome law, instilling a sense of hope and optimism in the face of adversity.

They may not get an injunction and wait out the litigation process.

That process would take up to two years.

In the meantime, this law remains in effect.

This law, which applies to all residential properties, regardless of the loan size or number of units, has the potential to cause significant disruption in the industry.

There is no distinction between owner-occupied and non-owner-occupied income property.

Apply to all types, institutionally originated, syndicated Wall Street, Fannie Mae, Freddy Mac, and privately funded loans, commonly referred to as private or hard money loans.

No more construction completion equity seconds to complete the project.

Third-party loan servicers may cancel their servicing contracts and refuse to service second-lien loans on residential income properties.

The issuer of the securities (the mortgage broker who created the trust deeds, investments, and related documents, including state and federal disclosures) must continue with loan servicing, which is an essential part of the investment contract, as outlined in the "Howey Case." The originating mortgage broker representing the private investors in the trust deed investment cannot resolve this issue.

https://www. findlaw. com/consumer/securities-law/what-is-the-howey-test. html

The option of unlocking property equity by obtaining a second has been extinguished.

This is a disaster for realtors, mortgage brokers, property owners, loan servicers, and title companies.

This is a beautiful new source of revenue for plaintiff lawyers (representing defaulting borrowers).

There is an open invitation for a defaulting borrower to pursue a stall tactic remedy, with a chance of finding a rogue judge who will side with them and find the mortgage servicer in violation of something, even if it is minor.

Enforcing a foreclosure as a remedy for a defaulting borrower on any residential property is now a legally precarious process.

All practitioners must immediately contact their real estate lawyer to discuss this monstrous new law. If you add the damage from AB-2424 and SB 1079, the legal complexity becomes a minefield through which one may travel without being destroyed.

Articles on AB-2424 and SB-1079 can be found on my website.

Additionally, dealing with the insurance crisis and association-related compliance (both of which require substantially rising costs) places stress on property ownership and tenants, as increased costs must be passed on to them. This, all combined, represents collective brain damage.

The clever mouse can work its way through the maze to get the cheese.