Jim Porter: New case helpes borrowers in foreclosure
Special to the Bonanza
In the face of millions of foreclosures across the country reflecting our economic downturn, the California Legislature passed several laws encouraging lenders to work with homeowners facing foreclosure.
One of those was Civil Code section 2923.5 which we wrote about in 2008. It applies to owner-occupied residential loans made from Jan. 1, 2003, through Dec. 31, 2007.
New foreclosure laws
Under Civil Code section 2923.5, effective September 6, 2008, a lender may not start the foreclosure process without contacting the borrower in person or by telephone (not a message) at least 30 days before filing a Notice of Default and#8220;in order to assess the borrowerand#8217;s financial situation and explore options for the borrower to avoid foreclosure.and#8221;
Note there is nothing in this code that requires the lender to rewrite or modify the loan; however, a lame attempt to force lenders to modify loans was enacted in 2008. (Section 2923.52)
Stop the foreclosure
With that bit of history, along comes Mabry v. Aurora Loan Services. In December 2006, the Mabrys refinanced the loan on their home in Corona, borrowing about $700,000. They fell behind in payments. According to their lender Aurora, Aurora employees made and#8220;many, many phone callsand#8221; to the Mabrys to discuss ways to avoid foreclosure. They claim to have received a fax from the Mabrys proposing a short sale. According to the Mabrys, no one ever contacted them about their foreclosure options.
Aurora started foreclosure proceedings. The Mabrys sued, asking the court to stop the foreclosure because Aurora had not contacted them to explore ways to prevent foreclosure per 2923.5. The trial court threw out the Mabry suit.
The Court of Appeal
The Court of Appeal and#8220;stayedand#8221; the foreclosure, asking the parties to submit briefs on section 2923.5. Not only did the Mabrys and Aurora submit briefs, but so did Bank of America, the California Mortgage Association and the California Bankers Association with and#8220;friend of the courtand#8221; briefs and#8212; a genuine show of lender power.
In a well written Opinion, the Court of Appeal listened to the evidence and issued a series of rulings, which for borrowers facing foreclosure was good new and bad news.
The good news
In order to ask a court to hold up a foreclosure proceeding under section 2923.5, it is not necessary to tender the full amount of the delinquent loan. Also, section 2923.5 is not preempted by federal law. California courts have jurisdiction.
And the really good news, because it was unclear whether the lender had in fact initiated contact with the Mabrys to discuss foreclosure-avoidance options, the foreclosure sale must be put off until a hearing is held to determine who is telling the truth-the lender or the Mabrys. Thatand#8217;s very good news for borrowers facing foreclosure whose goal is to stall that process.
The bad news
The bad news was that the Court of Appeal ruled that once an auction is held at the end of the foreclosure process, the sale is final. The only remedy section 2923.5 offers is a potential postponement of the foreclosure sale before it happens. I wish the court had gone further and ruled that if the lender had taken back the property at its own foreclosure sale, a 2923.5 argument could still be made that the sale must be set aside. But Iand#8217;m not a judge.
Although I am not a judge, I have formed an opinion about large institutional lenders who through their own incompetence and bureaucracy are unable or unwilling to work with delinquent homeowners who are sincerely trying to make good on their loans and work with their lenders toward short sales or loan modifications. Through these lenderand#8217;s ineptitude, they often end up needlessly foreclosing on properties, hurting themselves and their borrowers. I finally got that off my chest.
Under the new Mabry case, a lender must be able to document it contacted the borrower to explore options to foreclosure or their subsequent foreclosure may be set aside, but once the foreclosure sale is conducted, it is final.
One little point. I have heard people claim that if a lender cannot produce the original promissory note and deed of trust, it canand#8217;t foreclosure. Sorry, that argument wonand#8217;t hold up in court.
For their own good, institutional lenders should effectively work with their delinquent borrowers.
Jim Porter is an attorney with Porter Simon, with offices in Truckee, South Lake Tahoe, Incline Village and Reno. He is a mediator and was the Governorand#8217;s appointee to the Fair Political Practices Commission and McPherson Commission, both involving election law and the Political Reform Act. He may be reached at email@example.com or at the firmand#8217;s web site http://www.portersimon.com.