In a trend likely to continue through 2010, California has joined Massachusetts to become the second state in the nation to impose a moratorium on mortgage foreclosures. On February 20, 2009, as part of its recently-passed budget package, California enacted a 90-day mortgage foreclosure moratorium. The moratorium, included in the California Foreclosure Prevention Act, applies to first lien owner-occupied homes with mortgages recorded between January 1, 2003 and January 1, 2008. The Act, which sunsets January 1, 2011, adds 90 days to the existing 3-month statutory waiting period between the recording of the notice of default and the giving of the notice of sale.
The Act includes a procedure through which mortgage loan servicers can obtain an exemption order from the moratorium. To obtain an exemption order, servicers must apply to the California Commissioner of Corporations, the Commissioner of Financial Institutions, or the Real Estate Commissioner, as appropriate, and demonstrate that they have a “comprehensive loan modification program.” Upon receipt of an initial application for exemption, the regulator will immediately issue a temporary order, effective from the date of receipt, exempting the servicer from the 90-day moratorium. Within 30 days, the regulator will determine if the servicer has a comprehensive loan modification program and will issue a final order of exemption if appropriate. The Act requires “comprehensive loan modification programs” to include the following features:
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An intent to keep borrowers in their homes when the anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.
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Targeting a ratio of the borrower’s housing-related debt to the borrower’s gross income of 38% or less on an aggregate basis in the program.
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Some combination of the following features: (a) reducing the interest rate, as needed, for a fixed term of at least five years; (b) extending the amortization period for up to 40 years from the original date of the loan; (c) deferring some portion of the unpaid principal amount until loan maturity; (d) reducing the principal; (e) complying with a federally mandated loan modification program; and (f) other factors that the relevant commissioner determines to be appropriate.
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Long-term sustainability for the borrower of the loan modification solution.
If the regulator denies the initial application for exemption, the temporary order will remain in effect for 30 days and the servicer may submit a revised application. The Act takes effect 14 days after each commissioner issues regulations implementing the exemption order process. To date, no regulator has issued such regulations.
The California legislation represents a growing trend at the state level to address rising foreclosures through state-mandated delays in the foreclosure process. In addition to the Massachusetts legislation, which implemented a 90-day right to cure a default in May 2008, at least 14 state legislatures are considering foreclosure moratorium legislation to apply to all loans or, in some instances, defined categories of subprime loans, including:
Alabama: SB 95 would provide for a moratorium period of 180 days on foreclosure of subprime mortgage loans, with no interest or fees accruing during the moratorium period.
Arkansas: House Concurrent Resolution No. 1020 would encourage mortgage lenders to voluntarily impose a 90-day moratorium on all foreclosures of residential real property.
Colorado: HB 1276 would allow borrowers who contact a foreclosure counselor the opportunity to defer foreclosure sales for 90 days on first lien loans secured by owner-occupied property.
Connecticut: HB 6144 would provide for a moratorium on mortgage foreclosures of residential real estate until January 1, 2010.
Florida: SB 2524 and HB 653 would adopt a “foreclosure bill of rights” to give procedural protections to borrowers with mortgages secured by homestead property and to grant a borrower 60 days to obtain an appraisal of the property and subject foreclosure actions to court-ordered mediation.
Illinois: HB 3806 applies to subprime loans and certain loans with a negative amortization feature and would impose a foreclosure moratorium for one year following enactment of the legislation if a borrower resides at the property and has a household adjusted gross income of less than $250,000. The bill would permit such borrowers to remain in possession at reduced monthly payments. Lenders would be able to proceed with foreclosure only if they negotiate in good faith to modify the loan and comply with certain additional requirements.
Iowa: The Iowa House and Senate have each passed resolutions urging the governor to declare a state of economic emergency to permit an owner of real estate within the scope of the governor’s order to apply for a moratorium on a mortgage foreclosure.
Maryland: The Baltimore City Council wants to create a one-year moratorium on an individual eviction of an occupant that results from mortgage foreclosures. Currently, lenders must send the eviction notice 14 days before the scheduled date of execution of the writ of possession. The bill would extend the period to 365 days.
Michigan: HB 4034 would effectively stay judicial and non-judicial foreclosure sales for a one-year period.
Minnesota: HF 2233 would create a moratorium on judicial and non-judicial mortgage foreclosures. The legislation would grant borrowers or tenants the right to stay the foreclosure process and remain in possession of homestead property for up to two years if they make mortgage or rental payments equal to the lesser of the payment amount when the mortgage was foreclosed or 41 percent of their documented and verified monthly gross income.
New York: Assembly Bill No. 6756 would provide a one-year moratorium on the foreclosure of an owner-occupied subprime mortgage loan.
Ohio: HB 3 would declare a six-month moratorium on mortgage foreclosure actions on residential properties occupied by the owner of the property or the tenant of that owner. During the time of this moratorium, all of the following apply with respect to mortgage foreclosure actions on occupied residential properties: (1) No court may hear a complaint for foreclosure or issue a judgment on such a property; (2) No clerk of court may issue a writ of execution on such a property; (3) No foreclosed property may be sold at auction nor may any auction be scheduled to conduct such a sale; and (4) No court may confirm the sale at auction of such a property. Additionally, for a period of three years after the effective date of the legislation, a borrower may continue to occupy foreclosed property if the borrower makes escrow payments for taxes and insurance along with an amount equal to one-half of the monthly payment for interest and principal that was in effect at the time the foreclosure action was filed, or such other amount as the judge determines is just and equitable.
Rhode Island: SB 250 would impose an immediate 180-day moratorium on foreclosures and actions for evictions of tenants of foreclosed residential real property financed by subprime loans.
South Carolina: House Joint Resolution No. 3296 would provide for a one-year moratorium on residential real estate foreclosure actions, except where the foreclosing party provides an affidavit stating the mortgage lender did not steer the borrower into a subprime mortgage and loan without regard to whether the borrower would have qualified for a prime loan or if the borrower were not able to meet a term of the subprime mortgage.
Washington: SB 5810 and HB 1942 would provide that a mortgage holder, trustee or the holder’s agent cannot issue a notice of default until 30 days after contacting the borrower regarding borrower’s ability to pay.
By halting foreclosures temporarily, states are trying to buy time for an economic recovery to take hold - so that household incomes improve and property values begin to rise again. These actions, however, will probably impose additional mortgage costs on future borrowers as a result of the increased costs on lenders and servicers dealing with these moratoriums. Only time will tell whether the increased costs are outweighed by the benefit to those consumers who may still have housing due to a moratorium.
David Darland is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach David at 202-327-9707 or by email at ddarland@hudco.com.