February 24, 2009

By: Spencer P. Scheer, Esq.

Overview: A moratorium on certain foreclosures in the State of California will be implemented at the end of May of this year. The foreclosure moratorium has a variety of “twists and turns” that should be noted below. The moratorium does not prohibit foreclosure sales, it delays them.  The restrictions last until January 1, 2011.  The restrictions only apply to loans secured by first trust deeds, and for loans recorded between January 1, 2003 and January 1, 2008, and only when the borrower occupies the property at the time of the default.

Certain “loan servicers” that have implemented a comprehensive loan modification program that is approved by the DOC, DRE or DFI, can claim an exemption from the moratorium.

NOTE:  In accordance with the enactment of Civil Code 2923.54 certain loan servicers must file a separate declaration along with the Notice of Sale that shows whether they are exempt from the moratorium requirements.

NOTE: These requirements must be distinguished from SB 1137 (Civil Code §2923.5), a separate statute that requires that a loss mitigation meeting on covered loans occur prior to commencement of foreclosure (and for any foreclosures that were commenced prior to the effective date of the Civil Code § 2923.5 i.e. September 6, 2009). This foreclosure moratorium statute and SB 1137 have some similarities in terms of coverage and exemptions, but they impose separate obligations and requirements.

NOTE: Lenders and Trustees must take a comprehensive look on how to approach the increasing interrelated requirements of these statutes, bankruptcy and foreclosure law.  For example: What if a lender files a Notice of Default and commences the 90 day foreclosure moratorium period, before a Notice of Sale can be recorded.  Suppose the borrower files bankruptcy on the tenth day of the 90 day period, and the lender obtains relief from the stay to foreclose.  Does the 90 day moratorium start all over again?  Can the 90 day moratorium be waived by the BK court?  These questions will need to be resolved to protect creditor/trustee rights.

Specifics: This bill prohibits a mortgagee, trustee, or other person authorized to hold a sale from giving a notice of sale for an additional 90 days in order to allow parties to pursue a loan modification and  to prevent foreclosure, if the following conditions exist:

1.      The loan was recorded between January 1, 2003 to January 1, 2008;

2.      The loan is a first mortgage or deed of trust;

3.      The borrower occupies the property as their principal residence when the loan becomes delinquent; and

4.      The Notice of Default has been recorded on the property.

This bill does not apply to the following:

1.      Loans serviced by a mortgage loan servicer that has obtained an order from the Department of Corporations, Department of Real Estate, or Department of Financial Institutions exempting it from the 90 day foreclosure delay by providing evidence that the servicer has a comprehensive loan modification program;

2.      Loan serviced by a mortgage loan servicer that has applied for an exemption, but the final decision has not been rendered;

3.      Loans made, purchased, or serviced by a California state or local public housing agency or authority; or

4.       Loans that are collateral for securities purchased by a California state or local public housing agency or authority.

The bill does not apply if any of the following occurs:

1.      The borrower has surrendered the property, as evidenced by a letter confirming surrender or delivery of the keys to the property to the mortgagee, trustee, or beneficiary, or authorized agent;

2.      The borrower has contracted with an organization, person or entity whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries, or;

3.      The borrower has filed for bankruptcy, and the  case has not been dismissed or closed or a relief from stay order allowing foreclosure has not been issued.

This law will go into effect in late May (supposed to be 90 days from signing of the bill i.e. May 21, 2009. Bill believed to have been signed on February 20, 2009).

NOTE:  This adds one more layer to the ever increasing regulatory burden on trustees and beneficiaries seeking to proceed with foreclosure.  SLG will assist its Lenders and Trustee clients who need assistance on compliance and any loan servicers who want to apply for the exemptions from the moratorium specified in the statute.