Summary
This law misappropriates real property equity interest by government mandate.
SB 1079 addresses non-judicial foreclosures of one- to four-unit residential properties, whether they are owner-occupied or tenant-occupied. The law became effective on January 1, 2021. The foreclosure procedures are related to eligible bidders as described in California Civil Code 2924m.
The law introduces significant modifications to the non-judicial foreclosure procedure, particularly benefiting tenant occupants, new primary residence purchasers, non-profits, government entities, agencies, and districts. While it does not address tenant rent defaults, it does grant preferential rights for tenant occupants and new classes identified in the non-judicial foreclosure procedural law as 'eligible bidders'.
New risks are created for lenders funding loans secured by 1 to 4 units, whether institutional or originated through private equity capital obtained from private investors, lenders arranged by mortgage brokers, or securitized through Wall Street.
The law significantly reduces the security of protective equity, a key consideration when making loans on one- to four-unit properties. This reduction in security could potentially increase the risk for lenders.
AB 1079 misappropriates real property protective equity interest by government mandate.
Combine this monstrosity with AB 2424, which was recently passed into law, and we get a double whammy of property rights violations and erosion of protective equity rights by real property lenders.
An article on AB 2424 is contained on my website. In the search engine, type in AB 2424.
Article:
This Law remains effective until its sunset date of January 1, 2026 (unless the Legislature extends this date).
This Law results in extensions of the time to complete a non-judicial foreclosure, is more expensive, and is more complex, making it a less appealing remedy against defaulting borrowers of loans secured by 1 to 4 residential units.
Five or more residential, commercial, industrial, or vacant land properties are exempt from SB1079.
Nicknamed initially "Homes for Homeowners, Not Corporations," it ultimately became the standard "government misrepresentations to pick the pockets of lenders, and transferring the financial benefits to special interest groups as dictated by the government bureaucrats."
New foreclosure requirements encourage new homeowner purchasers and tenant occupants to bid on one to four residential units at the foreclosure auction or sale. They are classified as "eligible bidders."
The classification of eligible bidder status and preferential treatment will result in non-profit corporations and government entities (including agencies and districts) playing a significant role in acquiring a substantial number of such housing units.
The legislative intent is to encourage corporations and non-profit organizations engaged in the development and preservation of affordable housing to become active in acquiring properties at non-judicial foreclosure sales.
Foreclosure auctions or sales conducted by trustees should be recharacterized as "temporary placeholder foreclosure sales."
The highest third-party bidder or the lender foreclosing who credit bids in the absence of a third-party bidder becomes a placeholder unless an "eligible bidder" notifies the trustee within 15 days after the placeholder sale of their intent to acquire (purchase) the subject property. The 15-day period commences after the auction/sale (placeholder sale) is conducted/cried by the trustees.
Should no notice be received within the 15 days from an "eligible bidder," trustees within 3 days following the end of the 15 days, the auction/sale are authorized to execute and deliver trustees' deeds to either the highest third-party bidder or to the foreclosing lender (in the absence of the foregoing bidder).
Should a notice from an "eligible bidder" be timely received, trustees must wait an additional 30 days for a total of 45 days following the auction/sale (placeholder sale) to determine whether the noticing "eligible bidder" can produce the funds to complete his/her/its acquisition of the subject property.
If the 'eligible bidder' doesn't complete the acquisition of the subject property immediately, it would be great. In that case, the trustees are then authorized to issue their trustee's deeds within three days following the required 45-day period to either the highest third-party bidder or to the foreclosing lender in the absence of such a bidder.
The law does not provide a procedure to allow foreclosure trustees to demand and receive evidence from notifying "eligible bidders" of their financial ability to perform and acquire the subject property within the total 45 days following the auction or sale (placeholder sale).
'Eligible bidders' include tenants who are natural persons occupying the subject property. These tenants must have been occupying the subject property as their primary residence at the time and under an arm's-length rental or lease agreement entered into before the recording of Notices of Default. To be an 'eligible bidder,' the tenant cannot be the borrower's child, spouse, or parent. This clear definition ensures that all potential 'eligible bidders' are aware of their status.
Tenants are now to be delivered Notices of Sale along with borrowers when such Notices are posted and published by trustees. The Notices provided to tenants should include a disclosure of certain acquisition rights (whether extending to them individually or as a group), such as date, time, and location of scheduled auctions/sales (placeholder sales), the bidding instructions, and a reference to the website maintained by trustees as required under this law.
Tenants are to be informed that they are "eligible bidders" and may have the right to acquire the subject property post the scheduled auctions/sales(placeholder sales). As is consistent with existing law, such Notices should alert borrowers and occupying tenants to the possible postponement of the initially scheduled auctions or sales (placeholder sales), which should also be discussed and included in the information on the trustees' website.
"Eligible bidders" include the following:
Tenant-occupants as defined above.
"Prospective owner occupants"- any natural person who submits an affidavit to trustees conducting/crying such auctions/sales (placeholder sales) affirming that they (i) will occupy the property as their primary residence within 60 days of the delivery, acceptance, and recording of the deeds issued by the trustees, (ii) will remain in occupancy of the property as their primary residence for at least one year, (iii) are not the mortgagor or trustor, the child, spouse, or parent of the mortgagor or trustor (not in a Familia relationship), and (iv) are not acting as the agents of any person or entity acquiring the real property.
https://codes.findlaw.com/ca/code-of-civil-procedure/ccp-sect-2015-5/
Nonprofit associations, nonprofit corporations, or cooperative corporations in which eligible tenant buyers or prospective owner-occupants are voting members or directors.
Limited partnerships in which the managing general partners are eligible nonprofit corporations based in California (whose primary activities are the development and preservation of affordable housing). Note: A nonprofit corporation may establish a special-purpose entity, such as a limited partnership, for each property it acquires, which would include the occupants as voting members.
Nothing in the law prohibits a not-for-profit corporation from purchasing 30,000 homes at a significant discount and later amending or restating its articles of incorporation to become a for-profit stock corporation, or from creating for-profit subsidiaries and distributing profits through management fees, maintenance fees, rehabilitation overrides, and resale of the properties. Lawyering up would be necessary to navigate the complexities and tax implications of the conversion process.
Community land trusts, as defined in clause (ii) of subparagraph (C) of paragraph (11) of subdivision (a) of the R & T Code 402.1.
A limited-equity housing cooperative as defined in this Measure.
"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."
Interpretations and definitions:
Nothing in this law prevents an eligible tenant bidder who meets the defined conditions from being deemed a prospective owner-occupant.
"Eligible bidders" must provide an affidavit to trustees that they meet one of the statutory statuses and intend to submit a bid at the auctions/sales or may send written notice no more than 15 days after the auctions/sales (placeholder sales) of the intent to submit a bid to acquire the subject property.
Civ. Code 2924m(c)(2)."Eligible bidders" may submit a bid up to 5:00 p.m. on the 45th day after the auctions/sales (placeholder sales) were conducted/cried by the trustees.
Civ. Code 2924f(b)(8).This law requires that Notices of Sales posted and published by trustees be sent to tenants and the property owner are to include: i) a website, and ii) a telephone number and email, both available 24 hours a day, 7 days a week free of charge to any potential bidder, with specified information about the properties subject to the non-judicial foreclosure.
Civ. Code 2924m(d)(1)(A)-(C).Suppose the subject properties are not sold to prospective owner-occupants. In that case, no later than 48 hours after the trustees' auction/sale, such trustees or their authorized agents must make the following information available on the website (and by telephone and email upon request) as listed in the Notices of Saleincluding the date on which the auction/sale (placeholder sale) took place, as well as the additional information required by this Measure. An address for the authorized trustees (that can receive U.S. mail, including overnight delivery) must also be provided on the websites.
The information on the websites must remain public and accessible for at least 45 days after the trustees' auctions or sales (placeholder sales). Civ. Code 2924m(d)(4).
The Measure also imposes fines on property owners who fail to maintain vacant residential properties acquired through foreclosure auctions or sales. Failures to sustain may include (for example) permitting excessive foliage growth, allowing trespassers or squatters to access and remain on the properties, or failing to prevent mosquito population growth over standing water.
Civ. Code 2929.3(b).Cities or counties may adopt ordinances fining the "owner" up to $2,000 each day for the first 30 days and then $5,000 for each day thereafter when the subject property is not maintained in compliance with applicable law.
Civ. Code 2929.3(a)(3)(A)-(B).See comments set forth later in this summary regarding the potential liability of foreclosing lenders to be characterized as "owners" to ensure properties in foreclosure are properly maintained.
This Measure creates a "right of redemption" or the right to acquire residential properties consisting of 1 to 4 units by "eligible bidders" through either matching the credit bid of the foreclosing lender or paying $1 more than the amount offered by the third-party highest bidder at the auctions or sales. As such, "eligible bidders" are recipients of preferential treatment.
This law may result in the taking of real property interests owned by private individuals without applying the "just compensation" rules. It may also be interpreted as impairing existing contracts or enacting an ex post facto law. Thus, some observers argue that SB 1079 may violate the U.S. Constitution and/or the California Constitution.
Civ. Code 2924g: This law establishes that trustees' sales of property under powers of sale contained in deeds of trust or mortgages secured by real property containing 1 to 4 residential units are not to be deemed final until the earliest of the following excerpts of the revisions to the Civil Code accomplished as defined:
Civ. Code 2924 h f: Prospective owner-occupants are the last and highest bidders at the trustees' sale, the date upon which the conditions outlined in Civ. Code 2924h is met, then the sales are to become final. Trustees are to require the prospective owner-occupant to submit affidavits described in paragraph (1) of subdivision (a). Trustees may reasonably rely upon the affidavits.
Fifteen days after the initial trustees' sale (placeholder sale), unless at least one eligible tenant buyer is an "eligible bidder" who submits to the trustees either a bid under paragraph (3) or (4) or a nonbinding written notice of intent to place such a bid. The bid or written notice of intent to place a bid shall be sent to the trustees by certified mail, overnight delivery, or other method that allows for confirmation of the delivery date and is to be received by the trustees no later than 15 days after the trustees' sale.
The date upon which a representative of all eligible tenant buyers submits to the trustees a bid in an amount equal to or greater than the full amount of the last and highest bid at the trustees' sales. Such a bid is to be in the form of cash, a cashier's check drawn on a state or national bank, a cashier's check drawn by a state or federal credit union, or a cashier's check drawn by a state or federal savings and loan association or savings bank as specified in Fin. Code 5102 and authorized to do business in this state. Such bids are to be accompanied by affidavits stating that the persons represented meet the criteria outlined in paragraph (2) of subdivision (a). Trustees may reasonably rely on this affidavit.
The bids and affidavits shall be sent to the trustee by certified mail, overnight delivery, or another method that allows for confirmation of the delivery date, and must be received by the trustee no later than 45 days after the trustee's auctions or placeholder sales have taken place. If this occurs, eligible tenant buyers shall be deemed the last and highest bidder under the power of sale and shall be entitled to be the grantees under the deeds issued by the trustees.
Forty-five days after the trustees' sales, except that during the 45 days, "eligible bidders" may submit to the trustees bids in an amount that exceeds the last and highest bid at such auctions/placeholder sales, in the form of cash, a cashier's check drawn on a state or national bank, a cashier's check drawn by a state or federal credit union, or a cashier's check drawn by a state or federal savings and loan association or savings bank as specified in Fin. Code 5102 and authorized to do business in this state.
The bids shall be accompanied by affidavits identifying the category outlined in paragraph (3) of subdivision (a) to which the "eligible bidder" with a successful bid belongs and stating that this bidder meets the criteria for that category. Trustees may reasonably rely on this affidavit.
The bids and affidavits are to be sent to the trustees by certified mail, overnight delivery, or other method that allows for confirmation of the delivery date and are to be received by the trustees no later than 45 days after the trustees' placeholder sales.
As of 5 p.m. on the 45th day after the trustees' sale, if one or more "eligible bidders" have submitted bids, the "eligible bidder" that has submitted the highest bid shall be deemed the last and highest bidder under the powers of sale.
Trustees shall return any funds received regarding losing bids to the "eligible bidder" submitting such bids. If the conditions outlined in paragraph (1) of subdivision (c) for such sales to be deemed final are not met, then the following applies:
Section 2924g: Not later than 48 hours after the trustees' sale of subject property under Section 2924g, such trustees or their authorized agents shall post on their internet website the following information as required under paragraph (8) of subdivision (b) of Section 2924f:
(a)The dates on which the trustees' placeholder sales took place.
(b) The amount of the last and highest bid at the trustees' sale.
(c)The address at which trustees can receive documents sent by United States mail and by a method of delivery providing for overnight delivery, with such delivery being properly evidenced.
The information required to be posted on the internet website under paragraph (1) shall also be made available not later than 48 hours after the trustees' placeholder sales of the subject property under Section 2924g by calling the telephone numbers set forth on the Notices of Sale as required under paragraph (8) of subdivision (b) of Section 2924f.
The information required to be provided under paragraphs (1) and (2) shall be made available using the file numbers assigned to the "cases" that are set forth on the Notices of Sale as required under paragraph (8) of subdivision (b) of Section 2924f.
The information required to be provided under paragraphs (1) and (2) shall be made available for not less than 45 days after the placeholder sales of property under Section 2924g.
A disruption of any of these methods of providing the information required under paragraphs (1) and (2) to allow for reasonable maintenance or due to a service outage shall not be deemed to be a violation of this subdivision.
Prospective owner-occupants shall not violate this section if compliance with the requirements of Section 2924n renders them unable to occupy the subject properties as their primary residence within 60 days of the trustees' deeds being recorded.
Section 2924nis is intended to prevail over any conflicting provision of Section 2924h.
Civil Code. Code 2924 f b (8) (E). The foreclosure trustees or their authorized agents are responsible for maintaining the website, receiving and responding to notices and phone inquiries as referenced in the Civil Code. Code 2924 f b (8) (E).
COMMENTS:
The auctions/sales conducted/cried by trustees appear to be placeholder sales for the highest bidder to complete the acquisition of the subject property in the event an "eligible bidder" does not come forward to acquire the property. "Eligible bidders" may subsequently bid for the property with preference.
Will loan servicers, directly or through authorized agents, be obligated to perform property management functions following the auctions/placeholder sales conducted/cried by trustees? This question may require research into local government ordinances that describe when the requirement to maintain the property may be imposed. Some ordinances require that maintenance commence once the property or any unit is vacant, which may place the foreclosing lenders as the only responsible persons or entities to undertake property management and maintenance of the subject properties.
Who will pay the cost of property management and maintenance? Will such activities require a real estate broker's license, and will the existing languages in most deeds of trust and mortgages allow for beneficiaries/mortgagees to take possession of the property (as mortgagees-in-possession) and, thus, to engage property management and to accomplish the maintenance of the properties subject to the non-judicial foreclosure?
A significant issue is presented regarding credit bidding by foreclosing lenders. Traditionally, such lenders would open with an underbid and then instruct the crier of the trustees' auctions or sales to "bid up against" third-party bidders. This may not be possible when no third-party bidders exist and, thus, the intent of this Measure results in the foreclosing lenders' credit bids constituting the highest bid to be met or exceeded by subsequent "eligible bidders." To credit bid the full amount owing to the foreclosing lenders may eliminate collateral actions for fraud, waste, and other malicious or uninsured destruction of the improvements on the subject properties -- see Alliance Mortgage Co. v. Rothwell (1995).
Penalties for failure to maintain the subject properties are authorized as follows: This law amends Civ. Code2929.3 by increasing the penalties that local governmental entities can levy against property owners (or perhaps others) that fail to maintain the subject property (whether vacant or occupied) subject to or acquired through non-judicial foreclosure sales (Civ. Code 2929.3(a)(1)).
Fines may be levied for failing to care for the exterior of the property, failing to take action against trespassers or squatters, or for other violations as may be required by local ordinances (Civ. Code 2929.3(b)).
Suppose a governmental entity decides to fine property owners (or perhaps others) for failure to maintain the subject properties. In that case, the entities must provide notices to the persons liable which contain detailed descriptions of the alleged violation, stating the entity's intent to assess civil fines if the owners (or perhaps others) do not remedy the breaches within a set period of at least 14 business days.
This Measure imposes penalties on property owners (or others) for failure to comply with local governmental ordinances regarding property maintenance. Often, borrowers or property owners become nonresponsive after Notices of Sale are posted and published, and they discontinue maintaining or even vacating the subject properties. Such events may leave the only responsible party as the foreclosing lenders, which may be compelled to exercise the aforementioned mortgagee-in-possession provision of the deeds of trust or mortgages and appoint property managers.
The foreclosing lenders would then be obligated to fund the maintenance of the subject properties and to pay the required fees to avoid penalties imposed by local governments authorized by this Measure and local ordinances. The management and maintenance expenses may continue until the deeds of the trustees are issued to the final and highest bidder, who would be subject to the aforesaid management and maintenance obligations.
Should foreclosing lenders wish to avoid the complex steps required to foreclose non-judicially when the security properties are 1 to 4 residential units, such lenders may want to elect one of the following options before recording Notices of Default:
a)Negotiate with the borrowers Deeds in Lieu predicated upon obtaining title insurance coverage that no junior liens or encumbrances will remain as claims against the lenders after receiving title under such deeds; or
b)Negotiate an agreement with the borrowers to forbear for reasonable periods to allow for the subject properties to be placed on the market through real estate brokers who are members of the MLS in the local communities at listed prices consistent with the market values of the subject properties. Such agreements should be prepared by legal counsel representing the foreclosing lenders and separately the borrowers.
Some foreclosure trustees have suggested when summarizing this Measure or in marketing literature the funds which may be received from third-party highest bidders at auctions/placeholder sales be utilized to pay the foreclosing lenders' demand to pay off their/its loans and to pay all related foreclosure costs and fees including those imposed by the foreclosure trustees. The foregoing procedure would be to return the funds of the third-party bidders when and if received from an "eligible bidder" 45 days following the trustees' auctions or placeholder sales.
To use third-party highest bidders' funds received at the auctions/placeholder sales to pay the demand of the foreclosing lenders and the foreclosure costs and fees (including those of the foreclosure trustees) without concomitantly executing and delivering the trustees' deeds to such bidders may be a violation of the "trust" relationships among these bidders and the trustees. The funds of the third-party highest bidder are received and are to be held by foreclosure trustees as trust assets. Utilizing these funds for purposes other than those for which they were intended is likely an unacceptable concept or procedure. Should the foreclosure trustees possess real estate brokers' licenses or be members of the State Bar, such persons may be subject to discipline under the Real Estate Law or as members of the Bar. The applicable Sections of the Real Estate Law may include, but are not limited to, Bus. & Prof. Code 10177(d) and (q).
A major unanswered issue surfaces after the auctions or placeholder sales of trustees during the 45 days or longer, during which bids are to be received from "eligible bidders." What happens if titles to the subject properties are clouded by an event of whatever type or nature occurring during the 45-day plus period, including filing petitions under the Federal Bankruptcy Law? Since SB1079 introduces multiple levels of new complexity, adding uncharted liability and legal concerns, foreclosing lenders, servicing agents, and foreclosure trustees, as well as any agents thereof, should engage legal counsel before proceeding with non-judicial foreclosures of 1 to 4 residential units.
NOTES: Discussion
Should a petition under the Federal Bankruptcy Code be filed by persons or entities who are parties or principals in the non-judicial foreclosure proceedings, this may cause a significant delay or possibly prevent the completion of this authorized procedural process under California Law. Non-judicial foreclosures with power of sale arise from contract relationships established between borrowers and lenders in security devices. They are subject to the requirements of the California Civil Code, among others.
Fees and costs would likely be incurred to obtain representation by bankruptcy counsel. It is probable that funds, regardless of to or by whom they were intended or held, will come under the jurisdiction and control of the applicable bankruptcy court. Thereafter, the court will likely take control of the foreclosure process unless the court directs or authorizes otherwise, such as granting "relief from the automatic stay." Suppose funds from successful third-party bidders at the auctions or placeholder sales are in the trust accounts of the foreclosure trustees. In that case, these funds will likely come under the control of the applicable bankruptcy court. The successful third-party bidders may have at best equitable or unsecured claims before the bankruptcy courts.
Unless foreclosing lenders elect to exercise the mortgagee-in-possession provisions within the security devices, fee titles to the subject properties will remain in the name of the borrowers, as no trustees' deeds have been issued, delivered, accepted, and recorded. Exercising the mortgagee-in-possession provisions within security devices will likely expose foreclosing lenders to preparing and filing reports to be delivered to the borrowers (holders of the title to the subject properties), to the trustees, or possibly to the courts of appropriate or competent jurisdiction regarding the assets brought under the control of their lawfully appointed agents (including rental incomes, if any, and all expenses of management and maintenance incurred). If litigation or petitions in bankruptcy follow, the management and maintenance of the properties subject to the non-judicial foreclosures may be transferred by the court of the applicable jurisdiction to agents it appoints for such purposes.
Foreclosing lenders may only act as mortgagees-in-possession if their security interests in the subject properties are not extinguished. This means that the payment of the debt, as evidenced by the promissory notes and secured by deeds of trust or mortgages, may not occur before the issuance of the trustees' deeds. This issue conflicts with the inappropriate concept/procedure advanced by some trustees previously referred to in this summary, i.e., paying off the foreclosing lenders demands and paying foreclosure fees, costs, and expenses including those of the trustees at the time of auctions/placeholder sales with the proceeds obtained from successful third-party highest bidders. This would ignore the subsequent preferential rights of "eligible bidders" to acquire the subject properties (1 to 4 residential units) after the auctions or placeholder sales (an inappropriate use of funds held as trust assets by foreclosure trustees).