On September 20, 2024, Governor Gavin Newsom approved Assembly Bill 2424—a bill that will significantly transform the nonjudicial foreclosure process in California. For years, California’s nonjudicial foreclosure scheme was designed to “provide the [lender] with a quick, inexpensive and efficient remedy against a defaulting [borrower]; (2) to protect the [borrower] from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.” (Kan v. Guild Mortgage Co. (2014) 230 Cal.App.4th 736, 742.) To preserve these goals, trustees, lenders, servicers, and investors in the space must fully understand their newly created obligations imposed by AB 2424.
Since the financial crisis of 2008, continual changes to the nonjudicial foreclosure landscape are now commonplace in California. For all industry participants, understanding the new rules and implementing new procedures and systems for compliance will be key to gaining a competitive advantage in the marketplace. Annual or biannual amendments to the foreclosure statutes are now the rule, rather than the exception.
The starting point for any of this analysis is determining which procedural changes apply to your foreclosure and which ones do not. As a servicer, most of the amendments relating to the foreclosure process bestow new requirements on foreclosure trustees as opposed to servicers or investors. That being said, however, the new additional timelines are of the utmost importance when providing guidance on when to expect a foreclosure sale to conclude.
For Almost Everyone: The New Civil Code Section 2924f—Listing Agreements, Purchase Agreements, and Fair Market Value Sales
The biggest change to the nonjudicial foreclosure process in California is the injection of mandatory postponements for borrowers based on their execution and submissions of residential listing agreements, purchase agreements, and the requirement that certain foreclosed properties must sell at 67% of the property’s fair market value. This change to the foreclosure process will extend the time for completion of nonjudicial foreclosure sales. Each change is discussed below.
Mandatory Postponement: Submission of a Listing Agreement
The first major change to the nonjudicial foreclosure process is the inclusion of a mandatory 45-day postponement should the borrower submit a residential listing agreement to trustee at least five business days before the foreclosure sale. This is the new Civil Code section 2924f. Nonjudicial foreclosure trustees should be in clear and
constant communication with servicers and investors regarding the adequacy and receipt of these listing agreements.
Importantly, this procedure applies to all loans that are secured by residential real property containing no more than four dwelling units. Unlike other parts of the Civil Code that only apply to consumer purpose loans secured by owner occupied property, the new statute does not make a distinction concerning the type of loan or foreclosure. So long as the property in foreclosure is residential 1-4 property, this process will apply to the foreclosure.
Next, the listing agreement must be submitted to the trustee by “the mortgagor or trustor.” On its face, this would not allow a non-borrower, or a successor in interest of the borrower, to utilize the procedure. Likewise, the statute is clear that the trustor or mortgagor must submit the listing agreement to the trustee, not the mortgage servicer. Interested parties should be keen to verify that any listing agreement sent to the trustee is from a “mortgagor or trustor.” In a strict sense, if the submitter of the listing agreement is anyone other than the trustor or mortgagor, the postponement procedure need not be followed. Servicers and trustees should collaborate regarding the acceptance of listing agreements submitted by third-parties based on legal advisement, investor guidelines, and investment recoupment goals.
Under the statute, a “listing agreement” must be between the trustor or mortgagor and “a California licensed real estate broker,” who will list the property in foreclosure for sale “in a publicly available marketing platform for the sale of the property at least five business days before the scheduled date of sale.” (Amend. Civ. Code §2924f(e)(1).) There are several notable parts to this provision. First, the listing agreement must be with a licensed CA real estate broker; it cannot be with a friend, or merely a salesperson without a broker’s license. Second, the listing agreement itself must specify that the listing period will commence “at least five business days before the scheduled date of sale.” A trustee could arguably reject the listing agreement as not complying with the timing of the statute. Again, the case-by-case decisions to be made about the adequacy of any listing agreement that is submitted should be discussed between servicer and trustee. Last, there is no requirement that the listing agreement be bona fide, different than the requirements of a “purchase agreement,” discussed below.
Perhaps thankfully, the code only allows for only a single postponement based on the submission of a listing agreement that complies with the statute. This is a departure from other loss mitigation rules, such as Civil Code section 2923.6(g) related to loan modifications, which permits multiple applications to be submitted by a borrower if there is a documented “material change” in the borrower’s financial circumstances.
Notably, this procedure will affect all nonjudicial foreclosure sales on 1-4 residential real property, regardless of the type of loan. Servicers and trustees will need to implement procedures and systems to verify and track the submitted listing agreements and the corresponding postponements that they will cause. This information should be timely communicated by the trustee to the servicer so that accurate foreclosure timelines can be reported to interested loan investors. Also, investors and servicers should consider the use of pre-foreclosure remedial measures such as a judicially appointed receiver to minimize the effects of this new law and borrower abuses, oftentimes designed to stall legitimate foreclosure efforts.
Mandatory Postponement: Submissions of a Purchase Agreement
In addition to the postponement procedure after the submission of a mere listing agreement, should the mortgagor or trustor enter into a purchase agreement for the sale of the real property in foreclosure, and should that purchase agreement be sent to the trustee in the manner specified in the statute, then the mortgagor or trustor shall be entitled to an additional 45-day postponement. This is another procedure that applies to all foreclosures of 1-4 residential real property regardless of loan type or lien position.
Under the statute, “‘purchase agreement’ means a bona fide and fully executed contract for the sale of the property that is subject to a power of sale with a purchase price amount equal to or greater than the amount of the unpaid balance of all obligations of record secured by the property that includes the name of the buyer, the sales price, the agreed closing date, and acceptance by the designated escrow agent.” Trustees are now tasked with evaluating the adequacy and code-compliance of any submitted purchase agreement.
The first piece is that the purchase agreement must be bona fide. The statute does not provide a definition of bona fide, but one can assume that it must be the result of arms’-length negotiations, free from collusion or fraud, between consenting parties. Abuses may occur by borrowers who enter into fake purchase agreements to delay the sale without any actual intention of selling the property. Trustees should consult independent legal counsel, or servicer management and counsel if an issue would arise.
Next, the statute requires that the purchase price at foreclosure must be “equal to or greater than the amount of the unpaid balance of all obligations of record secured by the property.” This provision creates a difficult situation for all involved. First, what about the real estate commission to be paid under the listing agreement? If the purchase price is “equal to” or only slightly “greater than” all liens on title, then there is no money for the real estate professionals to be paid. Similarly, how are transfer taxes to be paid if the purchase price solely covers “all liens on title?” For servicers and trustees, without further guidance from the Courts or Legislature, purchase agreements should be processed in a way to effectuate the spirit of the law to limit borrower based lawsuits. In other words, servicers and trustees should not immediately concern themselves with issues such as real estate commissions when accepting purchase agreements.
More confusion is unfortunately added to the mix due to the statutory requirement that the purchase agreement’s proposed sales “price amount [be] equal to or greater than the amount of the unpaid balance of all obligations of record secured by the property.” How is the trustee to determine the “unpaid balance of all obligations of record secured by the property?” The trustee simply does not have this information on hand and a resort to recorded title documents will not give an actual figure of the “unpaid balance of all obligations of record,” since promissory notes and loan modifications are generally not required to be recorded. Nor can the trustee request this information under Civil Code section 2943, as a trustee named in a deed of trust is not an “entitled person,” as defined therein. (Civ. Code §2943(a)(4).) In any event, trustees will need to be equipped to handle incoming “purchase agreements” and to have systems in place to ascertain the total amount of the “unpaid balance of all obligations of record secured by the property.” Pre-foreclosure correspondence to other lienholders through the servicer, investor, or legal counsel should be pursued to “get ahead” of this potential pitfall.
The new statute further requires that the purchase agreement “include[] the name of the buyer, the sales price, the agreed closing date, and acceptance by the designated escrow agent.” Presumably, should the purchase agreement submitted to the trustee not include one of these items, it can be summarily rejected by the trustee. Consultation between servicer and trustee should occur on a case-by-case basis when evaluating the submitted documents.
Also, a purchase agreement is defined to include “acceptance by the designated escrow agent.” This is generally not included in a standard CAR form purchase agreement. An additional document received from the escrow company would be needed to show this acceptance. As such, the mere submission of a fully executed purchase agreement—without confirmed acceptance by a designated escrow agent—may be insufficient to trigger the 45-day extension.
Like the 45-day postponement based on the submissions of a listing agreement, there can only be one postponement for the submission of a purchase agreement. A thorough review of the purchase agreement documents will be required from the foreclosure trustee to avoid pitfalls and unnecessary postponements based on faulty documents. A clear understanding of the requirements placed on the borrower, as well as the timelines applicable to the trustee, are key to mastering this new procedure.
Mandatory Requirement for First Liens Only: Fair Market Value Opening Bid
A new requirement that applies to all first lien nonjudicial foreclosures on residential 1-4 property concerns the “price” at which a property must sell. Under the new statute, “the mortgagee, beneficiary, or authorized agent shall provide to the trustee a fair market value of the property at least 10 days prior to the initially scheduled date of sale, and the trustee shall not sell the property at the initially scheduled date of sale for less than 67 percent of that fair market value of the property.” Again, much to unpack.
First, this applies to all first lien loans secured by 1-4 residential real property, regardless of whether they are business purpose or consumer loans; junior lien foreclosures and HOA lien sales are unaffected.
For lenders and loan servicers, the required fair market valuation can be an internet website (Zillow, Redfin, etc.), or it can be a real estate professional. With that information, the trustee must then take that fair market value and ultimately sell the property for at least 67% of that value. Notably, there is no requirement to set the opening bid at that amount (likely because there are situations where the debt secured by the property does not eclipse the 67% value).
Now comes an ambiguity. The statute states that “the trustee shall not sell the property at the initially scheduled date of sale for less than 67 percent of that fair market value of the property,” and “if the property remains unsold after the initial trustee’s sale . . . then the trustee shall postpone the sale for at least seven days, and the property may be sold to the highest bidder.” An important question arises for the trustee: does that postponement come with another auction, or is it merely a seven-day waiting period before the prior auction concludes? If another auction is to be held, does the bid start at the prior high bid, or is it a new sale altogether? Important questions that the Legislature did not clarify. Trustees and servicers should preemptively discuss these important questions in anticipation that issues may arise.
Robust advisement and quality procedures will be required for lenders, servicers, investors, and trustees as the industry collectively navigates these new laws. The Ryan Firm stands ready to lead the default services industry in California in navigating these new changes.
***The content of this update has been prepared by The Ryan Firm, APC for informational purposes only and does not constitute legal advice. The information on this update shall not be construed as an offer to represent you, nor is it intended to create, nor shall the receipt of such information constitute, an attorney-client relationship. Decisions relating to the new laws and procedures discussed herein should be undertaken in coordination with independent legal counsel.***
Authored by Andrew J. Mase, Managing Attorney and Shareholder at The Ryan Firm, APC
Comments