California Civil Code 2923.6: California Courts’ Negative Rulings to Homeowners.
By Michael Doan on Apr 26, 2009 in Foreclosure Defense, Foreclosure News, Mortgage Servicer Abuses
In September, 2008, I wrote about the new effects of California Civil Code 2923.6 and how it would appear that home loans in California would require modifications to fair market value in certain situations.
Since then, many decisions have come down from local judges attempting to decipher exactly what it means. Unfortunately, most judges are of the opinion that newly enacted California Civil Code 2923.6 has no teeth, and is a meaningless statute.
Time and time again, California Courts are ruling that the new statute does not create any new duty for servicers of mortgages or that such duties do not apply to borrowers. These Courts then immediately dismiss the case, and usually do not even require the Defendant to file an Answer in Court, eliminating the Plaintiff’s right to any trial.
Notwithstanding some of these decisions, the statute was in fact specifically created to address the foreclosure crisis and help borrowers, as Noted in Section 1 of the Legislative Intent behind the Statute:
SECTION 1. The Legislature finds and declares all of the following:
(a) California is facing an unprecedented threat to its state economy and local economies because of skyrocketing residential property foreclosure rates in California. Residential property foreclosures increased sevenfold from 2006 to 2007. In 2007, more than 84,375 properties were lost to foreclosure in California, and 254,824 loans went into default, the first step in the foreclosure process.
(b) High foreclosure rates have adversely affected property values in California, and will have even greater adverse consequences as foreclosure rates continue to rise. According to statistics released by the HOPE NOW Alliance, the number of completed California foreclosure sales in 2007 increased almost threefold from 1,902 in the first quarter to 5,574 in the fourth quarter of that year. Those same statistics report that 10,556 foreclosure sales, almost double the number for the prior quarter, were completed just in the month of January 2008. More foreclosures means less money for schools, public safety, and other key services.
(c) Under specified circumstances, mortgage lenders and servicers are authorized under their pooling and servicing agreements to modify mortgage loans when the modification is in the best interest of investors. Generally, that modification may be deemed to be in the best interest of investors when the net present value of the income stream of the modified loan is greater than the amount that would be recovered through the disposition of the real property security through a foreclosure sale.
(d) It is essential to the economic health of California for the state to ameliorate the deleterious effects on the state economy and local economies and the California housing market that will result from the continued foreclosures of residential properties in unprecedented numbers by modifying the foreclosure process to require mortgagees, beneficiaries, or authorized agents to contact borrowers and explore options that could avoid foreclosure. These changes in accessing the state’s foreclosure process are essential to ensure that the process does not exacerbate the current crisis by adding more foreclosures to the glut of foreclosed properties already on the market when a foreclosure could have been avoided. Those additional foreclosures will further destabilize the housing market with significant, corresponding deleterious effects on the local and state economy.
(e) According to a survey released by the Federal Home Loan Mortgage Corporation (Freddie Mac) on January 31, 2008, 57 percent of the nation’s late-paying borrowers do not know their lenders may offer alternatives to help them avoid foreclosure.
(f) As reflected in recent government and industry-led efforts to help troubled borrowers, the mortgage foreclosure crisis impacts borrowers not only in nontraditional loans, but also many borrowers in conventional loans.
(g) This act is necessary to avoid unnecessary foreclosures of residential properties and thereby provide stability to California’s statewide and regional economies and housing market by requiring early contact and communications between mortgagees, beneficiaries, or authorized agents and specified borrowers to explore options that could avoid foreclosure and by facilitating the modification or restructuring of loans in appropriate circumstances.
SEC. 7. Nothing in this act is intended to affect any local just-cause eviction ordinance. This act does not, and shall not be construed to, affect the authority of a public entity that otherwise exists to regulate or monitor the basis for eviction.
SEC. 8. The provisions of this act are severable. If any provision of this act or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
The forgoing clearly illustrates that the California Legislature was specifically looking to curb foreclosures and provide modifications to homeowners in their statement of intent. Moreover, Section (a) of 2923.6 specifically references a new DUTY OWED TO ALL PARTIES in the loan pool:
(a) The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties,…..
California Civil Code 2923.6(a) specifically creates to a NEW DUTY not previously addressed in pooling and servicing agreements. It then states that such a DUTY not only applies to the particular parties of the loan pool, but ALL PARTIES. So here we have the clear black and white text of the law stating that if a duty exists in the pooling and servicing agreement to maximize net present value between particular parties of that pool(and by the way, every pooling and servicing agreement I have ever read have such duties), then those same duties extend to all parties in the pool.
So how do these Courts still decide that NO DUTY EXISTS??? How do these Courts dismiss cases by finding that the thousands of borrowers of the loan pool that FUND the entire loan pool are not parties to that pool?
Hmm, if they are really not parties to the loan pool, then why are they even required to make payments on the loans to the loan pools? As you can see, the logic from these courts that there is no duty or that such a duty does not extend to the borrower is nothing short of absurd.
To date, there are no appellate decision on point, but many are in the works. Perhaps these courts skip the DUTY provisions in clause (a) and focus on the fact that no remedy section exists in the statute (notwithstanding the violation of any statute is “Tort in Se”). Perhaps their dockets are too full to fully read the legislative history of the statute (yes, when printed out is about 6 inches thick!) Whatever the reason, it seems a great injustice is occurring to defaulting homeowners, and the housing crisis is only worsening by these decisions.
Yet the reality is that much of the current housing crisis has a solution in 2923.6, and is precisely why the legislature created this EMERGENCY LEGISLATION. Its very simple: Modify mortgages, keep people in their homes, foreclosures and housing supplies goes down, and prices stabilize. More importantly, to the Servicers and Lenders, is the fact that they are now better off since THEY GENERALLY SAVE $50,000 OR MORE in foreclosure costs when modifying a loan(yes, go ahead and google the general costs of foreclosure and you will see that a minimum of $50,000.00 in losses is the average). Thus it is strange why most Courts are ruling that the California Legislature spent a lot of time and money writing a MEANINGLESS STATUTE with no application or remedy to those in need of loan modification.
Well, at least one Judge recently got it right. On April 6, 2009, in Ventura, California, in Superior Court case number 56-2008-00333790-CU-OR-VTA, Judge Fred Bysshe denied Metrocities Mortgage’ motion to dismiss a lawsuit brought under 2923.6. Judge Bysshe ruled that 2923.6 is not a matter of law that can be decided in the beginning of a lawsuit to dismiss it, but is instead a matter of fact that needs to be decided later:
THE COURT: Well, at this juncture in this case the Court holds that section 2923.6 was the legislature’s attempt to deal with a collapsing mortgage industry, and also to stabilize the market. And the Court’s ruling is to overrule the demurrer. Require the defendant to file an answer on or before April 27, 2009. And at this juncture with regard to the defendant’s request to set aside the Lis Pendens, that request is denied without prejudice.
Hopefully, more judges will now follow suit and appeals courts will have the same rulings. To read the actual transcript of the forgoing case, please click to my other blog here.
Written by Michael Doan