Mike Belote, Esq.
By Michael Belote, Esq., California Advocates, UTA California Lobbyist
Like many aphorisms, the old saying that “those who enjoy laws and sausage should not watch either being made” has been attributed quite variously. For decades, Otto von Bismarck generally got the credit, but this has now been cast in severe doubt. And there is virtually no chance that credit should go to usual suspects like Mark Twain or Yogi Berra. Anyway, it is certainly true that watching laws being made, or attempting to influence the outcome of lawmaking, is not for the faint of heart.
As this column is written, the California legislature has reached the metaphorical midpoint in legislative year 2025. As of now, the Assembly has finished acting on its own bills, and the same is true in the Senate. After this, the process flips and precisely mirrors itself: the Assembly will begin considering Senate bills, and vice versa. And while this is happening, the state constitution requires the adoption of a balanced state budget for fiscal year 2025-2026, and the constitution does not much care if Congress has completed action on the “one big beautiful bill!”
Heading into the second half, one bill of massive interest to UTA would affect nothing less than the sanctity of security interests in real property loans. SB 681 (Wahab) is that bill. Out of a 105-page bill, which is part of the Senate’s “affordability package” are three pages which could literally wipe out the enforceability of “subordinate” deeds of trust.
Presented as an attempt to address the problem of “zombie mortgages”, SB 681 could affect the enforceability of every existing junior lien in California. Although the Senator carrying the bill has stated publicly that zombie mortgages are those that have been forgiven but do not die, the bill goes vastly further than loans which have been completely forgiven by lenders. Whether wittingly (an actual word) or unwittingly, the bill forbids an attempt to enforce the security interest in a subordinate loan if any of a defined list of “unlawful practices” has been committed by a servicer. Included among those unlawful practices are the failure to provide required periodic statements, and notices of servicing or ownership transfer. Thus, if a single required notice has not been provided, or cannot be shown to have been provided, the security interest is unenforceable.
Further, in order to proceed to enforcement of the security interest, the servicer must record a certification under penalty of perjury (this is a crime) that no unlawful practice was committed on the loan in question, or acknowledge what those unlawful practices were. It is difficult to imagine a servicer who would risk criminal prosecution to issue such a certification in order to proceed with a nonjudicial foreclosure on a subordinate lien, particularly since the law applies to existing deeds of trust, including those executed many years ago.
UTA is a prominent member of a coalition including commercial banks, mortgage banks, mortgage brokers, credit unions and title companies which are all opposed to SB 681. The coalition has submitted proposed amendments on the bill, which would eliminate the unlawful practice designation, eliminate the certification obligation, and clarify that otherwise valid security interests are not made unenforceable by the failure to send required notices. In those cases, current law provides for a damages remedy. But the opposition effort is certainly made more difficult by the fact that SB 681 enjoys the full force of inclusion in the Senate leadership’s affordability package.
On June 4, SB 681 was approved by the Senate on a party-line vote of 28-10 and sent to the Assembly for hearings and action. The coalition was gratified that Senator Tom Umberg, Chair of the Judiciary Committee, asked during the floor debate whether the second mortgage problem had been resolved, and indicated that he expected the issue to be resolved in the Assembly.
Not only does SB 681 go far beyond any common understanding of “zombie mortgages”, but the bill raises so many legal and constitutional issues that the language reads almost like a law school exam. In meetings with our coalition, Senate staff indicated that the bill should not be read to invalidate deeds of trust that are otherwise enforceable under applicable law.
But that is certainly not consistent with the plain language of the bill.
A second bill of tremendous interest to UTA is AB 1158 (Chen), designed to narrow and refine the provisions of SB 1079, first enacted in 2020. From its very inception, SB 1079 has been manipulated by investors seeking to acquire properties after trustee’s sales, by falsely claiming to be prospective owner-occupants or nonprofit entities. AB 1158 was approved unanimously by the Assembly Judiciary Committee in April. After that, the bill was considered in the Appropriations Committee, which is charged with examining bills raising fiscal issues for the state. Unfortunately, the Appropriations Committee decided to hold the bill in committee, rather than forward it to the full Assembly for action. Hundreds of bills were held in the committee, given the current precarious fiscal position of the state. But it is not clear at this time what unresolved fiscal issue may have existed for AB 1158. We are attempting to understand the committee’s rationale, and along with Assembly Member Chen, we are committed to reintroducing critical SB 1079 reform in January. The legislature is currently scheduled to recess for the fall on Friday, September 12. Until then, UTA is working with our coalition partners to protect the validity of junior liens, and to create sausage fit for human consumption.