Last month, Gov. Gavin Newsom signed Senate Bill 1079 into law as part of a package of 15 bills aimed at establishing new rights for tenants and community groups. Aimed at tackling California's affordable housing crisis, SB 1079 creates historic changes to nonjudicial foreclosure sales of real property containing one to four single-family residences. This bill makes nonjudicial foreclosures slower, more expensive, and a less appealing remedy against defaulting trustors-debtors, and will increase costs for lenders and for residential borrowers.
SB 1079 Changes
California's nonjudicial foreclosure scheme, codified in Civil Code Sections 2924-2924k (unless noted otherwise, all statutory cites are to the Civil Code as amended by SB 1079), "covers every aspect of [the] exercise of [a] power of sale contained in a deed of trust." Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497, 509 (2013), disapproved on other grounds as stated in Yvanova v. New Century Mortg. Corp., 62 Cal. 4th 919 (2016). This scheme serves three purposes: (1) provide the beneficiary-creditor with a quick, inexpensive and efficient remedy against a defaulting trustor-debtor; (2) protect the trustor-debtor from wrongful loss of the property; and (3) ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser. Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1153 (2011). SB 1079 upends the traditional period when a trustee's sale becomes final.
Historically, nonjudicial foreclosure sales on real property have been deemed complete and final when the auctioneer accepts the final bid and the trustee gives the purchaser a trustee's deed. See Millennium Rock Mortg., Inc. v. T.D. Serv. Co., 179 Cal. App. 4th 804, 809 (2009) (citing Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust, Section 10:206, p. 660 (Miller & Starr)). This finality provides the foreclosing parties with a relatively quick, inexpensive and efficient remedy against a defaulting borrower. See Moeller v. Lien, 25 Cal. App. 4th 822, 830 (1994). This finality, of course, only occurs after a borrower has received and passed on multiple opportunities to cure his or her default and to keep the property -- i.e., through redemption (Sections 2903, 2905) or reinstatement (see Section 2924c(a)(1), (e); Napue v. Gor May West, Inc., 175 Cal. App. 3d 608, 614 (1985)) of their loan.
Beginning on Jan. 1, 2021, foreclosing parties must adapt to and abide by SB 1079's modified nonjudicial foreclosure process for single-family residences. SB 1079 creates two new classes of buyers/bidders at a sale: (1) "eligible tenant buyers" and (2) "eligible bidders." "Eligible tenant buyers" include any natural person who at the time of the trustee sale occupies the real property as their primary residence under a rental or lease agreement as a result of an arm's length transaction with the trustor prior to the recording of the notice of default against the property and is not trustor's child, spouse or parent. Section 2924m(a)(2). An "eligible bidder" sweeps more broadly to include: (1) an eligible tenant buyer; (2) a "nonprofit association, nonprofit corporation, or cooperative corporation in which an eligible tenant buyer or a prospective owner-occupant is a voting member or director"; (3) a "limited partnership in which the managing general partner is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable housing"; (4) a "limited liability company in which the managing member is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing"; (5) a community land trust; (6) a limited-equity housing cooperative; or (7) "the state, the Regents of the University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state." Section 2924m(a)(3). Aimed at providing individuals with an opportunity to own foreclosed properties, an "eligible bidder" also includes a "prospective owner occupant" which is any "natural person" who submits an affidavit to the trustee affirming that he or she (i) will "occupy the property as [his or her] primary residence within 60 days of the trustee's deed being recorded," (ii) will occupy as residence for at least one year, (iii) is not the "mortgagor or trustor, or the child, spouse, or parent of the mortgagor or trustor" and (iv) is not acting "as the agent of any person or entity purchasing the real property." Sections 2924m(a)(1)(A)-(B), 2924m(a)(3)(B).
SB 1079's most groundbreaking change is permitting either an eligible tenant buyer or an eligible bidder to purchase the property after the trustee sale closes, unless the prospective owner occupant is the successful purchaser. If prospective owner occupant is the last and highest bidder at the trustee's sale, the sale is final. Section 2924m(c)(2). Otherwise, an eligible tenant buyer may purchase the foreclosed property by matching the last and highest bid price placed at the auction. Sections 2924f(b)(8)(A), 2924m(c)(3). An eligible bidder must exceed it. Sections 2924f(b)(8)(A), 2924m(c)(4). To purchase the property, an eligible tenant buyer or eligible bidder must deliver a written notice of intent to place a bid to the trustee "no more than 15 days after trustee's sale" and must submit a bid "no more than 45 days after the trustee's sale." Sections 2924f(b)(8)(A), 2924m(c)(3)-(4).
SB 1079 contains other procedural changes to the foreclosure process. First, it requires that a notice of sale for a single-family residence contain a specific notice to tenants regarding the tenants' potential right to purchase after the foreclosure sale. Section 2924f(b)(8)(A). Second, it requires lenders or the trustee to make a "good faith effort" to provide "up-to-date information regarding sales and postponements" by establishing an internet website and a telephone number to provide such information that is free of charge and available 24 hours a day, seven days a week. Section 2924f(b)(8)(B).
When lenders sell a home loan, they frequently bundle it with other loans to be sold for use in making new loans. SB 1079 stops this practice. It expressly prohibits a trustee from bundling the loan for sale and, instead, requires that each property be bid "on separately, unless the deed of trust or mortgage requires otherwise." Section 2924g(a)(4)
SB 1079 looks backward too, seeking to mitigate a previously recurring issue from the nearly endless wave of nonjudicial foreclosure during the 2008 downturn. Oftentimes, purchasers of real property would fail to monitor and maintain vacant foreclosed homes. Under existing law, the owner of vacant residential property purchased at, or acquired through, a foreclosure sale is required to maintain the property. Section 2923(a)(1)-(2). If the owner fails to maintain such property, the new bill dramatically increases the civil fine that may be imposed by governmental entities. Prior to SB 1079, governmental entities could impose a civil fine of up to $1,000 for each day that the owner fails to maintain the property after providing 30 days to remedy the violation. SB 1079 substantially raised the fines for noncompliance. Under SB 1079, a governmental entity may impose a civil fine for failure to maintain post-foreclosure properties to up to $2,000 per day for the first 30 days, and up to a maximum of $5,000 per day thereafter, subject to the discretion of the governmental entity. Section 2923(a)(3). The bill provides no guidance as to how or under what criteria governmental entities should exercise that discretion, thereby leaving it to the courts to define.
Finally, SB 1079 mandates compliance with recently enacted laws regarding eviction of tenants, including relocation assistance and just cause eviction in the case of a post-foreclosure eviction. Section 2924n.
SB 1079's Overlooked Challenges
While SB 1079 seeks to direct foreclosed real properties into the hands of tenants and homeowners, the cumbersome apparatus built by the bill is ambiguous, ripe for abuse, creates uncertainty and risk in the real estate market, and promotes litigation. With the increased risk and costs associated with foreclosures, SB 1079 may discourage bidding at foreclosure sales, thereby ultimately harming borrowers and secured creditors. Losses at foreclosure sales may force lenders to ration credit more aggressively, leading to a larger share of potential borrowers being denied mortgages, which could dampen housing demand, home prices, and the ability of individuals to purchase homes, thereby undermining the very goal that the bill sought to promote.
The potential legal hurdles that will be created by SB 1079 are manifold. The most glaring change created by SB 1079 is the right for tenants, "potential owner occupant" and certain other entities to match or outbid a successful purchaser at the foreclosure sale by 45 days after the sale is completed if proper notice is given as described above. This 45-day limbo period creates a myriad of potential legal issues that will undoubtedly need to be sorted out by courts.
A successful purchaser at a foreclosure sale takes title by a trustee's deed. Under Civil Code Section 2924h(c), a trustee's sale is deemed perfected as of 8:00 a.m. on the actual date of sale if the trustee's deed is recorded within 15 calendar days after the sale. That remains under SB 1079. Under California law, "a trustee is not required to deliver a deed to the successful bidder and may arrange to do so later." Roger Berhnhardt and Charles A. Hansen, "California Mortgages, Deeds of Trust, and Foreclosure Litigation (CEB)," 4th ed. Section 2.99A (2020); see Kleckner v. Bank of Am. Nat'l Tr. & Sav. Asso., 97 Cal. App. 2d 30, 34, (1950). However, under SB 1079, if an "eligible bidder" or "eligible tenant buyer" submits a written notice of intent to bid within 15 days following the sale, a trustee's sale remains "final upon acceptance of the last and highest bid" and is perfected as of 8:00 a.m. on the actual date of the sale if the trustee's deed "is recorded within 48 calendar days after the sale." Section 2924h(c). SB 1079 does not direct what a trustee is to do while waiting for an "eligible tenant buyer" or "eligible bidders" to provide notice of intent to submit a bid 15 days after the sale or to submit its matching or overbid 45 days after the sale. Rather than delivering a trustee's deed shortly after the sale, should the trustee hold on the trustee's deed upon sale for 15 days waiting for the eligible bidder to provide a notice of intent to sell and then wait longer to see if the eligible bidder submits a bid? SB 1079 provides no guidance for trustees on how to address this issue. If the trustee withholds the trustee's deed for 15 or 45 days, title to the property would remain with the trustor/borrower. If the trustor/borrower files a bankruptcy petition after the trustee's sale is conducted, but before the trustee's deed is recorded, SB 1079 compounds the uncertainty of situation. Under current law, courts have differed on the effect of execution, delivery, or recordation of a trustee's deed after a bankruptcy filing. In Bebensee-Wong v. Fannie Mae (In re Bebensee-Wong), 248 B.R. 820, 822 (B.A.P. 9th Cir. 2000), the court ruled that a trustee sale is considered valid when the highest bid was accepted prior to bankruptcy filing, even if the trustee's deed is recorded after the bankruptcy filing in accordance with California Civil Code 2924h(c). In In re Gonzalez, 456 B.R. 429, 432 (Bankr. C.D. Cal. 2011), the court ruled that if a borrower files bankruptcy after a trustee sale, Civil Code Section 2924h(c) does not validate postpetition execution and delivery of trustee's deed. By lengthening the time between the sale and the potential recording of the trustee's deed, the dichotomy and uncertainty in this area will become more prevalent.
The 45-day limbo period created by SB 1079 creates even more uncertainty if a tenant, in possession of the foreclosed property, files a bankruptcy petition. The right to purchase foreclosed property after a foreclosure sale constitutes a legal or equitable interest in property, therefore, constitutes property of the tenant-debtor's bankruptcy estate. 11 U.S.C. Section 541(a)(1) (a bankruptcy "estate is compromised of ... all legal or equitable interests of the debtor in property as of the commencement of the case."). Depending on foreclosed property, a bankrupt tenant could seek to sell its right to purchase foreclosed property in bankruptcy or seek to delay the ability to exercise its post-sale rights.
SB 1079 is also ripe for abuse. For instance, tenants living in a single family home likely lack the financial resources to purchase and own a home. As such, tenants are unlikely to have the financial resources to match the highest bidder at foreclosure sale. However, nothing in SB 1079 prohibits a tenant from assigning their rights as an "eligible tenant buyer" to third buyers who have the financial resources to purchase foreclosed properties, thereby contravening the goal of SB 1079. Unlike a prospective owner occupant who must submit an affidavit affirming that he or she is not acting as the agent of any other person or entity in purchasing the real property, an eligible tenant buyer does not have that restriction. Sections 2924m(a)(1)(D), 2924m(a)(2)(A)-(C). Thus, tenants, who may lack the resources to purchase property, may act as the agent for their party buyers to purchase properties at foreclosure sales at liquidation prices.
While the goals of SB 1079 are laudable, this bill is not the way to achieve them. This bill assumes that longer timelines will necessarily result in better outcomes for tenants and prospective homeowners, without adequately considering the additional costs associated with the delay. In addition to potential litigation costs, the delay associated with sales may generate additional costs. If an eligible tenant buyer or eligible bidder provides notice of intent to submit a bid, thereby delaying the finality of the foreclosure sale, this additional delay may generate costs that will ultimately be passed on to borrowers. For instance, a lender may have to continue making insurance payments; if the lender force placed insurance, the insurance payments can be substantial, which will not be part of, or reimbursed under, the auction bid. There is an additional cost simply due to lost time. For lenders, time is money; the delay means lost opportunity costs for lenders. The delay may result in additional maintenance costs. As one study noted, "Each day the home is occupied by a borrower not making his mortgage payments, that borrower is likely not taking care of the home, and it is likely the home will be sold for less at liquidation." Larry Cordell, "Working Paper No. 13-15 The Cost of Delay," Working Papers, Research Department Federal Reserve of Philadelphia, p. 13 (April 24, 2013). Under SB 1079, during this 45-day period, the defaulted borrower may continue to occupy the residence without making any payment and without likely taking care of the home. If the eligible tenant buyer or eligible bidder ultimately purchases the property at the end of the 45-day period, the additional insurance will not be recouped. Further, if they do not purchase property, the lost time and additional maintenance costs (i.e., repairing the roof, fixing the walls, etc.) falls on the lender. SB 1079's drastic revision to California's nonjudicial foreclose scheme, even though temporary, makes nonjudicial foreclosures slower, more expensive, and a less appealing remedy against defaulting trustors-debtors. The adoption of SB 1079 will cause a slowdown in the foreclosure procedure which will end up hurting lenders and borrowers, while benefiting attorneys.