Mortgage Foreclosure Crisis: Where Are We Now?
In December 2007, the United States underwent a severe economic downturn known as the Great Recession. The main culprit causing this financial calamity was the subprime mortgage crisis. Subprime mortgages were typically handed out to people with low credit scores and who were struggling with debt. Borrowers took on these high-risk loans and were given assurance that they would be able to afford their dream home by simply refinancing their mortgages. In due time, housing prices fell and borrowers began defaulting on their mortgage payments. As interest rates started to increase, the value of homes plummeted. As a result, foreclosed upon homes were valued less than the total amount of the loan borrowed.
California’s Legislative Response to the Foreclosures
As the economic decline took storm, California lawmakers initiated legislation in hopes of re-stabilizing housing prices and changing the direction of foreclosures. In 2008, the former governor of California, Arnold Schwarzenegger, implemented Senate Bill 1137 (SB1137) which required lenders to exercise their due diligence in contacting the borrower and providing them with some form of relief options such as a loan modification.
Prior to the enactment of SB1137, lenders were solely required to send a letter to a borrower informing them of a Notice of Default. Now, lenders are obligated to make multiple efforts in communicating with the borrower by person or by telephone prior to filing a Notice of Default. A Notice of Default is basically a recorded notice to borrowers and its successors that there has been a default in payment of the loan. A copy of the notice must be mailed to the borrower within 10 days of the recordation date. If the borrower does not cure the default within three months, the lender may record a Notice of Sale at least after 90 days a Notice of Default is recorded. In addition, SB1137 imposes a $1,000 fine on lenders who do not properly maintain the foreclosed property.
Analysis of the California Foreclosure Prevention Act
Mortgage foreclosures, however, continued unabated. Another stop-gate measure was needed. The State of California enacted the California Foreclosure Prevention Act (CFPA) in 2009. The CFPA made it mandatory for lenders to wait an additional 90 days between the filing of a Notice of Default and moving forward with a Notice of Sale. This seemed to work. With these laws in place, an estimated $300 billion was generated in housing wealth and mortgage foreclosures were reduced by 16%.
A synthesis of the court dockets collected by Trellis echoes these statistics. There was a noticeable decrease in the percentage of mortgage foreclosure filings for Los Angeles County in 2010. This brief dip corresponds with the implementation of CFPA, an act that stayed in effect until January 1, 2011.
California Courts and Foreclosure Laws
Lawyers are faced with representing lenders and borrowers as a consequence of the mortgage foreclosure crisis. As borrowers default on their loans, lenders have the option to either pursue a judicial foreclosure or a nonjudicial foreclosure. A judicial foreclosure is a less attractive approach since it requires the lender to file a complaint in court making it costly. However, it is the ideal option for the lender in the event the sale price of the property falls below the full amount of the borrower’s obligation. That way, a lender may try to obtain a deficiency judgment.
A more affordable, quicker approach for lenders is to bring forth a non-judicial foreclosure. Once a Notice of Default is recorded, a foreclosure is initiated on the deed of trust of the property. This way, a lender may request the trustee to sell the home in order to satisfy the loan amount. A borrower has up to five days before the foreclosure sale to stop the sale and reinstate the loan.
In Kevin Stillman v. Golden Empire Mortgage (for instructions on how to pull up a case on Trellis click here), the borrower filed a preliminary injunction to prevent the foreclosure of his property. Stillman argued that the lender failed to properly inform him in writing that he was not eligible for a loan modification. Additionally, Stillman claimed that the interest rate was wrongfully increased. The Honorable Robert A. Dukes denied Stillman’s motion for a preliminary injunction on the basis that the loan servicer was not required to respond to a borrower’s loan modification application. Prior to the repeal of Civil Code section 2923.6, a loan servicer was required to communicate with a borrower if a complete loan modification application was submitted. Since January 1, 2018, lenders were no longer required to do so. Ultimately, the lender’s demurrer was sustained on all counts and an Entry of Default was submitted.
A more promising tale could be told in Frances Armstrong v. Specialized Loan Servicing, LLC, et al. where the lender had the Trustee of the Deed of Trust record a Notice of Default against Armstrong’s property. The lender attached a declaration of due diligence to the Notice of Default alleging that Armstrong was contacted to discuss her financial situation and foreclosure relief options. However, Armstrong claimed that the lender did not make any attempts to communicate with her whatsoever. A Notice of Trustee Sale against the property was recorded. Thereafter, Armstrong did communicate with the lender and it was determined that the next step was for Armstrong to complete a short sale application, which was submitted. Several months later, Armstrong contacted the lender to obtain a status on her application. She was informed that the status was still pending. Armstrong filed a complaint alleging that the lender was in violation of the Homeowner’s Bill of Rights, negligence, and unfair business practices.
The Honorable Mary H. Strobel issued a tentative decision on Armstrong’s ex parte application for a Temporary Restraining Order and an Order to Show Cause re a preliminary injunction. It was determined that since the parties had discussed the short sale application, any violation of the obligation for the lender to communicate with Armstrong regarding foreclosure relief had been cured. Nonetheless, Judge Strobel explained that the lender did not have authority to record a Notice of Sale while Armstrong’s short sale application was pending. There was sufficient evidence showing that the lender intended to move forward with the foreclosure sale, that Armstrong was not assigned a single point of contact, the declaration of due diligence attached to the Notice of Default was inaccurate, and that the lender breached the duty to exercise reasonable care. At this time, the hearing on the Order to Show Cause has been continued to a later date.
Are We Still in a Crisis?
As of January 2019, there were a total of 56,251 foreclosure filings nationally, which is 19% lower than the filings in 2018. Although foreclosure rates are lower today than in previous years, it is uncertain whether there will be an increase in mortgage foreclosures in the future. This is partly because a reliance on national data hides provoking trends emerging in local markets. Take Los Angeles County as an example, where the percentage of mortgage foreclosure filings continues to hover at the same levels that existed when the housing bubble burst. Has the crisis ended? Or is it just back where it started?
Originally published at blog.trellis.law.
