California Faces Scrutiny Over New Law That Makes Homeownership Tougher
A new law that reportedly makes it tougher to access capital due to restrictions, causing jitters from banks, is facing scrutiny in the Golden State.
The California Mortgage Association, California Credit Union League, United Trustees Association and several businesses and individuals contend that Section 2924.13 and California housing regulations unconstitutionally impair existing contracts, strip away established property rights and violate due process and equal protection.
On behalf of these groups, Buchalter and Wright, Finlay & Zak sued the California Attorney General Rob Bonta to challenge the constitutionality of the Golden State's newly enacted statute ? Civil Code Section 2924.13, claiming that it ?dramatically disrupts long-standing foreclosure, lending rules in California, and makes homeownership more difficult.?
On Dec. 15, plaintiffs moved for a preliminary injunction to preserve the status quo while the court considers the serious constitutional and federal law concerns raised by the statute.
The challenged provisions of AB 130 were intended to address abandoned loans known as ?Zombie Mortgages." But, as enacted, Section 2924.13 broadly reduces?and, in many cases, eliminates?the enforceability of virtually all loans secured by subordinate liens on residential property, according to the firm.
Section 2924.13 also redefines routine loan servicing practices as ?unlawful? and imposes new restrictions on foreclosure rights, creating serious risks for junior lienholders and borrowers in need of foreclosure prevention alternatives.
At a time when only 15 percent of Californians can afford a median-priced home, the law limits borrowers? access to credit products that many homeowners and small businesses rely on, it contends.
Separately, Avi Sinai, Esq., founder of Los Angeles-based Sinai Law Firm, told GlobeSt.com that "California is trying a new 'people-first' approach to help families keep their homes." While that sounds like a great idea, it?s making banks and lenders very nervous.
?Because the new law is so strict and gives homeowners powerful remedies in court, it may lead to less access to capital.?
Keep in mind, Sinai said, while this law applies to second mortgages, lenders are rightfully wary of additional regulatory changes that might come in the future.
For a typical family, this means two things, according to Sinai.
First, it might be harder to get a HELOC (Home Equity Line of Credit) for a kitchen makeover. Second, the few banks that will offer this product will charge much higher fees to cover the cost of all the new paperwork.
?In the end, a law that was supposed to save people money might actually make it harder to access cheap capital via a home equity line of credit,? Sinai said.
?Pros? of the Regulation
Meanwhile, Yardi Matrix offered ?pros? to the regulation, such as protection against Zombie Mortgages.
Doug Ressler, business manager at Yardi, stated that it prevents surprise foreclosures. The law targets dormant second-lien mortgages that suddenly ?resurface? by requiring written communication with borrowers at least every three years; otherwise, foreclosure becomes illegal if standards aren?t met.
It also increases buyer awareness and time to respond by requiring servicers to disclose whether the loan was charged off or ownership/servicing was transferred and to notify borrowers of their right to contest before sale.
Furthermore, servicers must file a declaration under oath confirming compliance (or detailing violations) of all required practices, including those of past servicers.
Homeowners could challenge foreclosure proceedings if servicers failed to comply with the law.
Source: GlobeSt/ALM