The mad rush by policymakers to do something in the wake of the mortgage and foreclosure crises has hit California with a vengeance.
Operating year-round and already the busiest state legislature in the country, California lawmakers have introduced a veritable tsunami of bills designed to address the rise in defaults and foreclosures. The proposals touch virtually every area of real estate, including those affecting lenders, servicers, brokers, foreclosure trustees, asset managers and landlords.
The mortgage bills raise not only critical policy questions, but also political issues. The failure of a state senator to vote for a major bill on foreclosures, for example, was cited as one reason for submitting recall signatures for a ballot vote which could end the senator's career.
Probably the most visible proposal – and the most likely to be enacted – is S.B.1137. The author, Sen. Don Perata of Oakland, is one of the most powerful legislators in California. His proposal first attempted to require lenders to conduct in-person meetings with borrowers at least 30 days prior to recording a notice of default to begin a foreclosure. When that proposal was defeated, real estate groups began an intense round of negotiations to determine if common ground could be reached on foreclosure issues.
As passed by the state Senate and forwarded to the Assembly, S.B.1137 now requires that lenders contact borrowers, or show diligent efforts to make contact, at least 30 days prior to notice of default.
The purpose of the contact, which may be handled by telephone, is to ‘assess the borrower's situation and explore options for the borrower to avoid foreclosure.’ The borrower would be permitted to designate a certified counseling agency, lawyer or other advisor to speak to the lender on his or her behalf. Special transition rules will apply to foreclosures already begun by the effective date of the bill.
Other features include special mailings that warn tenants of foreclosure proceedings, extended time for tenants to vacate after foreclosure sales and special powers to local governments to levy fines of up to $1000 per day for failing to maintain real estate owned properties.
After extensive discussions and amendments, all major real estate groups removed any opposition to the bill. Mortgage bankers and brokers, commercial banks, trustees and others are now officially neutral.
Presented as an urgency measure which requires a 2/3 vote in each house of the legislature, S.B.1137 was approved by the state Senate on a narrow, largely party-line vote of 28-10. If passed by the Assembly and signed by Gov. Arnold Schwarzenegger, the bill will take effect immediately.
However, some provisions – including the obligation to make contact with borrowers – will not become operative until 60 days after the governor's signature. Thus, this requirement could kick in by the middle of summer.
If action in the state Senate has coalesced largely around S.B.1137, the situation in the lower house is far more chaotic. In the Assembly, real estate groups continue to oppose a variety of measures with potentially catastrophic effects on lending and the availability of capital.
With A.B.1830, for example, the Assembly leadership has proposed highly restrictive definitions of subprime, nontraditional and high-cost mortgages, with limitations on rates and fees, prepayment penalties, balloon payments and rebuttable presumptions of inability to pay. Any violation of the very precise and restrictive rules would constitute a defense to foreclosure.
Other relevant bills in the Assembly include A.B.2740, proposing extensive new limitations on servicing fees and requirements on servicers to respond within specified periods to requests for information; A.B.2359, which proposes to eliminate holder-in-due-course protections for lenders, brokers and the secondary market in the case of high-cost loans as defined in the bill; A.B.2187, which would require borrowers in default to be provided with a statement of rights concerning foreclosure, in the language which was used in negotiating the loan; A.B. 2880, requiring bonds for certain lenders; and others.
The political situation in the California legislature is far too fluid to permit accurate predictions about the fate of these bills. Having placed its weight behind S.B.1137, for example, the state Senate may refuse to pass a number of the bills forwarded to it from the Assembly. Then, too, Schwarzenegger may see fit to veto bills he concludes would hinder mortgage availability in the state.
Finally, a number of the bills may be preempted by actions of Congress or federal banking regulators. Answers will be clear by fall, when the legislature adjourns at the conclusion of the 2007-2008 legislative session.
Michael Belote is a principal in California Advocates, a Sacramento, Calif.-based lobbying firm, and is the California lobbyist for the United Trustees Association. He can be e-mailed at mbelote@caladvocates.com.
