California's Foreclosure Surge Leads to Stricter Regulations

California's Foreclosure Surge Leads to Stricter Regulations

The federal government and several states have taken corrective measures to diminish the fallout from predatory lenders and fraudulent subprime mortgage bankers. Several of these measures aim to make it easier for owners to retain their homes while they renegotiate their mortgages.

One such legislation passed by Congress was the Mortgage Forgiveness Debt Relief Act of 2007, which eliminates taxes on mortgage indebtedness. Congress hopes the measure will encourage restructuring between lenders and homeowners and discourage impending foreclosures.

States are also taking proactive steps to forestall the rising foreclosure rates. Because foreclosure laws vary from state to state, rehabilitative measures also differ. In California, for instance, owners may face two types of foreclosure proceedings. The first is a judicial foreclosure, which is somewhat rare and requires the lender to sue the owner in a court proceeding. In this type of foreclosure, the owner can redeem the property through a buy-back from the successful auction bidder one year after the auction. The lender can also pursue a deficiency judgment against the borrower to recover the difference between the amount owed (including fees and penalties) and the amount received from the home auction.

The second type of foreclosure is a non-judicial foreclosure, also known as "foreclosure by power of sale" (since the mortgage document must contain a sales clause). More common than judicial foreclosures, non-judicial foreclosures are handled by trustees appointed in a deed of trust. In these cases, lenders forego their rights to pursue deficiency judgments. Also, proceedings can be deferred for a year based on allowed postponement reasons set forth in California Civil Code 2924 g(c)(1). Possible reasons include a mutual agreement between the lender and owner, bankruptcy, a beneficiary's (lender) request, a trustee's discretion or operation of law by the court (which can occur when there is an allegation of fraud against the lender).

Non-judicial foreclosures are preferred due to the shorter time frame of the proceedings.

California's legislature has noticed a subculture of fraud arising from the foreclosure economy. Specifically, California Civil Code 2945-2945.11 declares that:
"homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded pursuant to Section 2924 until the time surplus funds from any foreclosure sale are distributed to the homeowner or his or her successor."

To protect homeowners from unscrupulous "consultants," the regulation broadly defines those considered to be a consultant, including those who solicit or make representations to owners that, for compensation, they can stop or postpone foreclosures, obtain extensions, obtain forbearances from beneficiaries, or help owners avoid credit disrepair, along with other rehabilitative or preventative actions.

Because of the various ways that foreclosure consultants can commit fraud against unknowing homeowners, the code provides homeowners the right to demand that consultant service contracts be in writing, as well as the power to rescind foreclosure consultation contracts the owners deem fraudulent and misleading. The code's intent is to promote fair dealing; California courts are allowed to liberally construe article provisions to achieve this intent.

Civil Code Section 2945 also provides relief for homeowners victimized by unscrupulous foreclosure consultants. A foreclosure consultant who violates the terms of the code can be fined up to $25,000 - or even face imprisonment. Additionally, victimized homeowners can recover treble damages - three times the compensation given to the foreclosure consultant - along with reasonable attorney fees.

California has taken extra exigency measures to stem the tide of foreclosures. The state implemented a 90-day moratorium on foreclosures. The stay focuses on properties with a first mortgage on which a notice of default has already been filed. Also, under the proposal lenders will have to show that they have installed aggressive programs to keep homeowners in their homes.

To help understand their rights, homeowners facing foreclosure in California should consult with an experienced attorney knowledgeable in California foreclosure laws. They should also check the official state website for additional information on foreclosure prevention programs.

ABOUT THE AUTHOR: Law Offices of H. Michael Soroy
The Law Offices of H. Michael Soroy represents property buyers, sellers, and lessors in real estate proceedings and transactions. We handle legal aspects of purchase and sale, development, construction, mortgages, foreclosures, and leases of commercial and residential real estate (the land and the structures attached to it).

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.