Mediation Proposal Comes to California

By Michael Belote, Esq., California Advocates

Economies go up, and economies go down, but the business of legislating just keeps going. Just as General Motors makes cars, legislators “make” bills; the essence of legislating is identifying problems, both real and imagined, and proposing solutions, both good and bad.

With the rise in defaults and foreclosures, it was clear that legislators would be working overtime crafting “solutions”. But the sheer number of proposals in both Sacramento and Washington, D.C. has amounted to nothing less than a legislative tsunami. The ink was barely dry on SB 1137 here in California, imposing a duty to make a good faith attempt to contact borrowers at least 30 days before recording notices of default, when the California legislature enacted SBx2 7, creating a 90-day foreclosure delay unless lenders adopt comprehensive loan modification programs.

In addition to the 30-day and 90-day programs, California has considered dozens of additional proposals related in some fashion to loans and foreclosures. Measures relating to high-cost mortgages, unlawful detainers following foreclosures, loan modification consultants, auctions, translation of loan documents, reverse mortgages, maintenance of foreclosed properties, and more, were all considered during this legislative year. UTA and other real estate groups were constantly reacting to these proposals.

Two days before the close of the legislative session on September 11, powerful California legislators introduced AB 1588 which could be the most important foreclosure bill yet. As introduced, AB 1588 creates the “Monitored Loan Workout Program”. In this context, the word “monitored” is misleading: what the bill actually proposes is nothing less than binding arbitration of loans prior to foreclosure.

Under the provisions of AB 1588 (authored by very powerful Assembly members, including the Speaker and the chair of the Banking Committee), notices of default on residential loans must include a notice that the borrower has the right to participate in the monitoring program. If the borrower elects to participate in the program, “no further action may be taken to exercise the power of sale until the completion of all sessions” under the program.

Monitors are unelected persons with experience in real estate litigation. They would be paid $750 per file, to be paid initially by trustees! If a modification occurs, the borrower pays half of the monitoring fee. While the monitoring program is proceeding, the borrower must deposit 60% of the monthly payment into an insured depository institution.

AB 1588 authorizes the monitor to make a recommendation on the loan, including interest rate reductions, term extensions, deferral of principal, or reductions of principal. If the borrower accepts the recommendation, the bill provides that the recommendation “shall have immediate effect”. If the lender (the bill consistently and incorrectly refers to “trustees” in place of lenders)rejects the recommendation, the borrower may bring a civil action to enforce the recommendation, and the court apparently has no discretion except to enforce the agreement.

Based in some fashion on a mediation program currently in effect in Nevada, AB 1588 effectively empowers unelected arbitrators to order mortgage modifications to existing contracts, with mandatory enforcement by courts. As such, the bill raises a host of troubling issues, including impairment of contract, lack of judicial discretion, discouragement of residential lending, logistical issues in a state as large as California, and more. How many monitors would be necessary to handle potentially every residential foreclosure in California?

As presently drafted, AB 1588 contains an urgency clause, meaning that a 2/3 vote is required for enactment and that the bill would take effect immediately if signed by the Governor. The Speaker of the Assembly has expressed a desire to enact the bill before the end of this calendar year, which will be difficult unless both houses of the legislature return to Sacramento before the planned January 4 resumption of the legislative session. But clearly the bill will be the subject of major attention during 2010.

A large coalition of lender and other real estate groups has formed to express major concerns about AB 1588. Obviously UTA will be active in opposition. This bill may well amount to a foreclosure moratorium by another name. Going far beyond prior proposals in the California Legislature, AB 1588 is a major assault on nonjudicial foreclosure, and provides excellent evidence for the value of UTA. Support for the association is absolutely critical!