Foreclosure rates are declining in California. Many tout an improving economy as a reason for this trend. The impact of new legislation that restricts lenders and mortgage servicers from foreclosing on residential mortgages in a timely and efficient manner has also played a significant role. Among the new legislation that has influenced the decline in foreclosure rates in California is the "dual tracking" restriction, which prevents lenders and mortgage servicers from initiating nonjudicial foreclosure proceedings while a completed loan modification application is pending review.
Dual tracking restrictions arose out of the Multistate/National Mortgage Settlement. California's version is contained in the newly enacted California Homeowners Bill of Rights, which took effect in January 2013. The Consumer Financial Protection Bureau also has promulgated new rules restricting dual tracking; the rules go into effect in January 2014.
A nonjudicial residential foreclosure in California generally takes approximately four months to complete. Under the new statute, if the borrower timely submits a completed loan modification application, the time it takes to nonjudicially foreclose is extended by several months, if not more. Section 2923.6 of the California Code of Civil Procedure requires that if a residential borrower submits a complete application for a first lien loan modification, a foreclosure may not proceed until the mortgage servicer makes a written determination that the borrower is not eligible for a first lien loan modification and any appeal period for such decision has expired.
Accordingly, under Section 2923.6, even when a loan modification application is denied, the foreclosure must be delayed at least 31 days after the borrower is notified in writing of the denial. If the borrower unsuccessfully appeals the application denial, the nonjudicial foreclosure is further delayed at least 15 days after denial of the appeal.
Making things even more difficult for a mortgage servicer are the remedies that the newly enacted California statute provides to borrowers. Before the enactment of the California Homeowner Bill of Rights, a borrower in default was generally required to tender the amount due to successfully obtain an injunction that would prevent or delay a nonjudicial foreclosure. Under the new statute, if a foreclosure proceeds while a completed loan modification application is pending review, a borrower may obtain injunctive relief to prevent or delay the foreclosure along with actual economic damages. A prevailing borrower may also seek the recovery of attorneys' fees and costs. To make matters worse, if the court finds that a material violation of the statute was intentional or reckless, or resulted from willful misconduct, the court may award the borrower the greater of triple actual damages or statutory damages of $50,000.
The impact of the new legislation on California foreclosures is palpable. There were twice as many foreclosures initiated in December, before the California Homeowner Bill of Rights came into effect, as there were in April of this year. For good reason, given the new remedies provided to borrowers, California servicers are being more cautious in exercising their right to foreclose. While foreclosure rates may be declining, the new remedies will likely fuel an increase in litigation by borrowers.