By Julia M. Wei, Esq.
Buried in the New Year’s Day bill was SEC. 202, which extended the Mortgage Debt Forgiveness Relief Act through 2013. Except, the section was cryptically called “EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.” That means for homeowners who were approved for short sales or were foreclosed upon through December 31, 2013, they are still eligible for the tax relief to avoid the tax on the debt forgiveness (which is ordinarily considered income).
If you recall, the original law was passed in 2007 and intended to provide relief through the end of 2009. However, it became clear that lenders were still conducting foreclosure sales and approving short sales after 2009 and so the relief was extended by the Emergency Economic Stabilization Act of 2008 to continue through December 31, 2012.
If you're interested in reading the bill, it's here and Section 202 starts on Page 25.
In July, I posted a snippet about the "Homeowner's Bill of Rights" ("HOBR" or "HOBoR"), also known as the California Foreclosure Reduction act.
At the firm's law blog, I later wrote with more specificity about HOBR explaining some of the requirements that have changed about notices to foreclosure sales -- such as:
- Before a Notice of Default ("NOD") may be recorded, the borrower is entitled to a Pre-NOD notice advising of the borrower's right to documentation.
- After an NOD is recorded, the servicer must send the borrower a notice within 5 business days advising of foreclosure prevention alternatives ('FPA")
- The servicer must send the borrower a written acknowledgment letter 5 days after receipt of borrower's loan modification application.
- Denial letters of loan mod applications must include information about the appeals process
- Foreclosure notices must be personally served.
- If a trustee's sale is post-poned more than 10 days, the servicer must provide a written notice to the borrower within 5 business days.
- Most importantly - the servicer must rescind the NOD or cancel the trustee's sale when the borrower executed a "permanent foreclosure prevention alternative.
In addition to HOBR, Governor Jerry Brown also signed into law SB1191 in late September, which requires landlords in foreclosure to disclose that fact to prospective tenants. This law goes into effect January 1, 2013. More details here on the firm's blog and here and Senator Simitian's site.
With much fanfare, the Attorney General's office announced today the passage of a collection of bills intended to protect homeowners who are attempting a loan modification.
Among the key provisions, the statutes will:
-Require creditors to provide documentation to a borrower that establishes the creditor’s right to foreclose on real property prior to recording a notice of default.
-Require creditors to provide documentary evidence of ownership, the chain of title to real property, and the right to foreclose, at the time of the filing of a notice of default.
-Prohibit creditors from recording a notice of default when a timely-filed application for a loan modification or other loss mitigation measure is pending.
-Prohibit creditors from recording a notice of sale when a timely-filed application for a loan modification or other loss mitigation measure is pending.
-Prohibit creditors from recording a notice of sale while a borrower is in compliance with the terms of a trial loan modification or after another loss mitigation measure has been approved.
-Require creditors to disclose why an application for a loan modification or other loss mitigation measure has been denied.
-Require that notices of foreclosure sales be personally served, including notices of foreclosure sale postponement.
-Provide homeowners with a private right of action in instances in which the requirements set forth in the legislation are not followed.
These cluster of bills (Senate Bill 1470-74) will amend California Civil Code Section 2923.5 and 2924 (which is where the non-judicial foreclosure laws are located) and will add new sections: 2923.6, 2924.9, 2924.10, 2924.11, 2924.12, 2924.13, 2924.14, 2924.15, and 2924.16 to the Civil Code.
Perhaps the most important for consumers is that this legislation bars dual-tracking, which I have always considered to be a confusing and misleading process.
The documentation required to "prove" that a lender has the right to foreclose seems a bit nebulous to me, but there is a list of suggested documents and the new process will require a statement setting forth the facts supporting why the beneficiary (or its agent or assignee) has the right to foreclose. These parts of the statute seem unduly burdensome. It would have been easier to default to what the bankruptcy court requires in the Proof of Claim process instead, which is pretty standardized at this point.
By: Julia M. Wei, Esq.
A series of cases have come down in the last few weeks that have some very serious ramifications for lenders.
The most dramatic case is that of Lona v. Citibank, based on a property right here in my back yard. The fact pattern in Lona is that the bank foreclosed and Lona sued the bank to void the sale on the absurd theory that the lender made him an unconscionable loan he couldn’t possibly afford therefore the loan was void. (Apparently, he’s a mushroom farmer in Hollister making $40k/yr)*.
Lona alleged that he agreed to refinance the home, on which he owed $1.24 million at the time, in response to an ad. The monthly payments were more than four times his income, so unsurprisingly, he defaulted within five months and the home was sold at a trustee’s sale in August 2008.
Lona obtained two re-financed loans: the first being $1.125 million, a 30-year term and an interest rate that was fixed at 8.25% for five years and adjustable annually after that, with a cap of 13.255 and the second loan being $375,000, with a term of 15 years, a fixed rate of 12.25%, monthly payments of nearly $4,000, and a balloon payment of $327,000 at the end of the 15 year term.
Lona testified that English was not his first language, he was 50 years old at the time of the loan and he that he did not understand the loan documents. Of course, he also did not read the loan documents.
After Citibank foreclosed, it filed an unlawful detainer action (“UD”) to evict Lona, but the UD was consolidated with Lona’s lawsuit to void and set aside the foreclosure sale. According to Citibank, Lona had been “living for free” in the house and had not posted bond or paid any “impound funds.” (since 2007!!!)
San Benito County Superior Court Judge Harry Tobias said Lona’s “bare allegations” were not enough to persuade him that the bank or the broker had engaged in misconduct and that it was “hard to believe” that the Lonas weren’t “responsible for their own conduct,” especially since they owned other property that had been foreclosed upon.
Despite the craziness of Plaintiff’s theory, the appellate court rendered a 32 page opinion that discussed in major detail that:
1) The borrower did not have to tender offer (which goes against almost a century of a legal precedent); and
2) The borrower’s allegations of the loan being unconscionable were not wholly disproven by the lenders.
The Court decision stated “Lona had received $1.5 million from the lenders and had not made any payments since June 2007. Meanwhile, he and his wife continued to live in the house for free, without paying rent or any impound funds…” and so it was quite aware of the inequities or injustice of the situation. However, the Court still concluded that the Lenders did not meet their burden of proof on summary judgment and so the case may continue at its snail pace until trial. [Lona v. Citibank No. H036140. Court of Appeals of California, Sixth District. (December 21, 2011.)]
The other case that came down a week before Lona (Dec. 21) was the Bardasian (Dec. 15) case, where the borrower sued because the lender’s trustee did not discuss loan mod options with her as required by Civil Code Section 2923.5. The court granted the borrower’s injunction and like Lona, the borrowers did not tender, nor put up an undertaking or surety for the bond. The lower court had ruled at the injunction hearing that the trustee had not complied with the code and that Bardasian must bond in the amount of $20k. When she failed to do so, the lower court dissolved the injunction.
On appeal, the appellate court concluded that since the injunction had been issued after the court had ruled on the merits stating:
“Plaintiff seeks postponement of the foreclosure sale until the defendants comply with Civil Code [section] 2923.5. Plaintiff has established that BAC Home Loan Servicing did not comply with Civil Code section 2923.5 prior to the issuance of the notice of default on September 15, 2010.” “Plaintiff states under penalty of perjury that no contact was ever made at least 30 days before the notice of default was issued…”
that the injunction was not actually “preliminary” at all, but that the plaintiffs had essentially won their argument showing that the defendants had not complied with Section 2923.5 and so no Notice of Default could successfully issue and the trustee’s sale could not take place until Section 2923.5 had been complied with. (Bardasian v. Santa Clara Partners Mortgage C068488. Court of Appeals of California, Third District. (December 15, 2011).
So in one month, two appellate cases came down where the borrower could either pursue voiding a trustee’s sale or enjoin one without tendering!
2012 will prove to be an interesting year as more decisions stemming from the subprime meltdown start coming down the pipeline.
* The decision contained a footnote that Lona’s loan application that apparently stated Lona made $20k/month, or $240k/yr. Clearly, as stated income loans go, that was a whopper!