August 3, 2020 To: Members of the Assembly Judiciary Committee From: Undersigned Organizations Re: SB 1079 (Skinner): as proposed for amendment: OPPOSE Dear Assembly Member, SB 1079 (Skinner) is scheduled to be heard in the Assembly Judiciary Committee on Wednesday, August 12, 2020. The undersigned organizations are opposed to the measure as proposed for amendment, and we are writing to respectfully request your “NO” vote. At the outset, we understand and appreciate the author’s good faith objective of promoting the acquisition of residential properties by owner-occupants. We also appreciate very much the hard work and time dedicated by the author’s staff and Assembly Judiciary Committee counsel in discussing and evaluating potential approaches to address the problems identified by the author. Unfortunately, after many hours of discussions, we have concluded that the provisions of SB 1079 as proposed for amendment will be at best ineffective and at worst counterproductive in achieving the goals of the bill. Providing a 45-Day Period for Specified Persons or Entities to Purchase Properties After a Trustee’s Sale is Unnecessary and Will Contribute to Blighted Neighborhoods: As proposed for amendment, SB 1079 will establish a 45-day period after a foreclosure sale for tenants, owner-occupants, and housing organizations to purchase residential properties. Despite all good intentions, we believe this change will not materially increase owner-occupancy in residential neighborhoods, could very well harm owners losing their properties to foreclosure, and will prolong a lack of maintenance of properties, contributing to blight. First, we would offer a few observations about foreclosure sales generally. Perhaps it could go without saying, but a foreclosure sale is not a positive circumstance. An owner-occupant is losing a home, and if the Members of the Assembly Judiciary Committee Opposition to SB 1079 August 3, 2020 Page 2 property is rented, the tenant may well be displaced. Foreclosure sales are an unfortunate but necessary result of defaults in mortgage obligations: if lenders cannot recover their security for unpaid mortgage obligations, they cannot continue to make loans. But the entire objective of the law is to provide an orderly, fair and public process to maximize the sale price at a trustee’s sale. This is not primarily for the benefit of the lender, who is entitled only to the amount of the loan in default and costs. For nearly 100 years, the point of the process is to maximize the foreclosure sale price for the benefit of the borrower, who is entitled to any equity realized above the amount necessary to satisfy the lender. Therefore, any proposal which discourages bidding at foreclosure sales goes against nearly a century of public policy and threatens to harm owners losing their homes, not lenders. We believe that providing a post-sale, 45-day period for specified persons to “outbid” the purchaser at the foreclosure sale will discourage and depress bidding. Potential bidders will not wish to see funds tied up for 45 days after the sale, without interest, with the possibility that the whole process will be for naught. The very people specified in the bill who can buy the property during the 45-day period, all of whom could have bid at the foreclosure sale, will have every incentive to wait until after the sale. Meanwhile, no one has any incentive to maintain the property during the 45-day period, not the owner losing the home, not the tenant who may be displaced, not the lender who has no access to the property. During the 45-day period, very negative circumstances can occur, despite attempts to make the bid at the foreclosure sale “irrevocable”. This sounds good in theory but will be ineffective in practice. The successful bidder could file for bankruptcy during the period, cancel the cashier’s check intended to purchase the property, decide to purchase another property, all without any practical or realistic recourse. Again, during this period, the property is likely not being maintained, and property taxes not brought current. And this entire risk is created with the hope that specified entities step up during the 45-day period; the same entities who could have bid at the foreclosure sale can now wait and bid $1 more than the foreclosure sale amount. There have been discussions about providing a shorter window during the 45-day period for entitled persons to file an “expression of interest” in purchasing the property. This too sounds better in theory than in practice. If the property is rented, the tenant will have every incentive to file such an expression, in order to stay in the property as long as possible without paying rent. And there is no realistic way to penalize those who file an expression of interest but cannot or do not follow through with the purchase. Regrettably, we have concluded that the 45-day provision in SB 1079 will not work to achieve the intended objective, can harm owners losing their homes, and will simply prolong the period during which no one has any incentive to maintain distressed properties. Provisions in the Bill Preventing “Bundling” are Completely Unnecessary and Duplicative of Current Law: SB 1079 proposes to add a new subdivision to Civil Code Section 2924g, to read: “A trustee shall not bundle properties for the purpose of sale. Each property shall be bid on separately, unless the deed of trust or mortgage provides otherwise.” But current law, appearing just below this new proposed language, reads as follows: “When the property consists of several known lots or parcels, they shall be sold separately unless the deed of trust or mortgage provides otherwise.” Members of the Assembly Judiciary Committee Opposition to SB 1079 August 3, 2020 Page 3 Why is it necessary to restate current law? What does this new language accomplish? Appellate courts will attempt to ascribe some meaning to the new language, because of the maxim of statutory construction that the legislature does not accomplish futile acts. Further, we are unaware of properties being bundled for sale in any event. We are aware of foreclosures conducted against a developer for an entire subdivision, but this subdivision’s sale occurs as proscribed by the deed of trust or mortgage. As a practical matter, properties cannot be “bundled” for sale in a typical residential foreclosure: if Ms. Smith’s home is bundled for sale along with Ms. Jones’ home and sold for one amount, how could anyone determine how much each property sold for, such that the former owner could be paid any surplus proceeds? Provisions Which Increase the Penalty for Failing to Maintain Properties Following Foreclosure are Unnecessary and Not Supported by Any Evidence: SB 1079 proposes to amend Civil Code Section 2929.3 to increase the penalty for failing to maintain properties following foreclosure from up to $1000 per day to up to $10,000 per day. As proposed for amendment, the bill would increase the amount to up to $2000 per day. The problem is that we have seen zero evidence that the penalty amount in current law is not working to achieve the intended effect. The penalty was created during the Great Recession to encourage purchasers at foreclosure, which were mainly lenders, during the collapse in home prices during the foreclosure crisis. But there is no evidence that this authority for local government is not working to maintain properties. Purchasers at foreclosure, whether the lender taking the property back on a credit bid, or third-party purchasers intended to fix the property and “flip” it, have every incentive to restore the property and sell it quickly. And while we understand that $2000 per day provides more incentive than $1000 per day, we believe that current law, amounting to $30,000 per month, provides a very, very robust incentive to maintain properties. In conclusion, we have worked hard with the gracious collaboration of the author’s office and committee consultant to find approaches to maximize the owner-occupancy of neighborhoods. The objective is laudable, but the provisions of SB 1079 as proposed for amendment will not achieve the desired result. For these reasons, we are opposed and would again respectfully request your “NO” vote. Sincerely, American Financial Services Association California Association of Realtors California Bankers Association California Chamber of Commerce California Mortgage Association California Mortgage Bankers Association California Land Title Association California Credit Union League United Trustees Association cc: Jith Meganathan, Staff Counsel, Assembly Judiciary Committee Daryl Thomas, Consultant, Assembly Republican Caucus