9.9 Earthquake in Default Servicing Turns California Into Judicial Foreclosure State



Have you heard the news?  California is a judicial foreclosure state?  


Okay, so it’s not like it’s official… yet.  But, I’m going to go ahead call it early.  It’s like Oregon, Nevada, Hawaii, and the other states that have passed state laws related to foreclosure that we all might have seen were guaranteed to transform non-judicial states into de facto judicial foreclosure states, even though that didn’t appear on the surface to be the case.


Are you starting to see the pattern emerge here?  If not… let me draw you a map… 


Foreclosures rise in non-judicial state, homeowners complain to legislators who finally manage to pass a law pertaining to the non-judicial process that makes foreclosing non-judicially more time-consuming and costly BUT most importantly, rife with potential liability.  Foreclosures slow down immediately as the law firms involved in foreclosing pause to assess impact of new law.


The first time I saw this dance in action was in Hawaii… back in 2011.  


The Hawaii legislature, in early May of 2011, passed SB 651, which I called the “nation’s toughest foreclosure bill,” in my article announcing the bill’s passage.  Basically, it modified the state’s non-judicial foreclosure process to require the party foreclosing to submit documents showing the chain of title to establish proper standing and further required the parties to participate in a state run mediation process.


Homeowners were positively ebullient to the point of being rapturous. In fact, a group of them on Maui who had been reading my column all year, called me from a bar the night the bill passed the House committee, and I could barely make out what they were shouting other than “IT PASSED!”


The next day I found out more, and spoke with Representative Herkes and Senator Baker, the two legislators that sponsored the legislation.  I told them they should not relax yet, that the banking lobby would not lay down, and that they should keep the pressure on until the bill was actually signed by the governor.


That’s inside Hawaii’s state legislature building, pretty cool, right? 

A little more than a month passed and I was on Oahu meeting with Rep. Herkes and others in the state’s legislature, sharing what I’d learned about the mediation process and dealing with homeowners… and it was later that same week when Fannie Mae announced that they would no longer be foreclosing non-judicially in Hawaii.

What?  Fannie said what?  Wait, can they do that?  I asked the legislators I knew… and the answer was… well, yes they could.  The legislature hadn’t made the new requirements carry over to the judicial process… no one ever used the judicial process.  Well, they would now, I told them.


Several in the state legislature were incredulous, saying that the judges would never go along with circumventing the intent of the state legislature.  One politician even asked me what I thought of the idea that they circulate a petition to show the support for the new law among the people.  I replied that I thought the idea of a petition was “adorable.”  After that, I suggested under my breath, maybe a bake sale?


I saw the nature of what had gone on right away, and told several legislators that Fannie Mae couldn’t care less what they wanted or thought.  Fannie Mae may sound like your grandmother, but they operate like Goldman Sachs meets Tammany Hall.  And sure enough a conference call the legislature tried to set up with Fannie the next day never happened… Fannie backed out at the last minute… no surprise there, in fact, I called it the day before.


Today, Hawaii has made the foreclosure process even tougher, and you want to know what’s happened… foreclosures slowed for a while before starting to pick up, and today Hawaii is a judicial foreclosure state.  The laws that everyone worked so hard to pass did essentially nothing… at least, nothing in terms of a permanent cure to the problem of people losing homes.



Nevada’s AB 284… 


Nevada passed a law in 2011 that was so tough it stopped foreclosures dead in their tracks.  Nevada’s Attorney General Mastow backed AB 284 and when it passed it was huge national news.  There was a new sheriff in town and her name was AG Mastow.  She had backed  a law that made filing a fraudulent  document in the county recorder’s office potentially a felony subject to a $5,000 fine.


The month following AB 284 becoming law in Nevada foreclosure filings in Clark County dropped from 5,000 a month to 800.  Today, however, the numbers have started to rise to about 1500 a month… because today they are judicial foreclosures.  It has taken the mortgage servicing industry more than a year to convert their processes, but Nevada is now a judicial foreclosure state for all intents and purposes.


Foreclosure Radar says that there are over 75,000 Las Vegas homeowners who haven’t made a mortgage payment in over 90 days, acknowledging that some (read: many) haven’t paid in years.  But just like Hawaii’s new laws, Nevada’s AB 284 didn’t change the situation faced by homeowners in one of the hardest hit of all states, it just delayed things.


And now… just as in Hawaii… the judicial foreclosures come along with deficiency judgements, meaning that the homeowner can be responsible for difference between the sale price and the total debt… called the “deficiency.”  Different states calculate deficiencies differently, but for example, if the total debt owed is $200,000, and the home only sells for $150,000 at the foreclosure sale, the the deficiency would be $50,000.


Some states allow lenders to seek personal judgments against debtors to recover deficient amounts and once lenders get a deficiency judgment, they may be able to collect by doing such things as garnishing wages or levying bank accounts. In most non-judicial foreclosure processes, there are no deficiency judgements allowed.


In Nevada, a lender foreclosing judicially may obtain a deficiency judgment following foreclosure, but the amount of the judgment is limited to the lesser of:

  • the difference between the total debt and fair market value of the home, or
  • the difference between the total debt and foreclosure sale price (Nev. Rev. Stat. § 40.459).



The Oregon Trail… 

Oregon was another state I watched pass strong consumer protection laws this past year, again affecting the state’s non-judicial foreclosure process, only this time I wasn’t going for it… like every other media outlet did hook, line, sinker, rod, reel, boat, trailer and trailer hitch.

In fact, I first found out about Oregon’s law during a podcast interview with Clarke Balcom, my trusted lawyer for the state of Oregon.  Clarke was explaining Oregon’s new laws and right in the middle of our discussion, I heard it… the law amended the non-judicial foreclosure process and that was enough for me.  Clarke had to agree, in fact he had been worried about the same thing.

And today, just like Hawaii and Nevada, Oregon is discovering that it’s a judicial foreclosure state, perhaps not officially, but as a practical matter.



And now… Introducing California’s Homeowner Bill of Rights… 


Even with my experience watching what had happened in Hawaii, Nevada and Oregon, California’s Homeowner Bill of Rights had me fooled for quite a while.  At first, seeing the unbelievable amount of resistance put up by the banking lobby, I didn’t think it had a prayer of passing, after all, California’s legislature had tried to pass much watered down versions of consumer friendly foreclosure legislation in each of the two prior years and failed on both occasions miserably.


But California’s Attorney General Kamala Harris went to bat for the “HBR” in a big way and seemed to literally force it through the state’s legislature, even with literally hundreds of banking industry lobbyists showing up in Sacramento to oppose it.  All the heavy hitters were there… MERS’s well known MVP, Bill Hultsman was there, as was the very scary General Counsel of the FHFA, Alfred M. Pollard, but in the end the legislature passed the bill and Governor Brown signed it only days later.


Fundamentally, California’s HBR simply codified the new servicer standards found in the $25 billion National Mortgage Settlement, and perhaps that’s why I didn’t see what its true impact would be at the time. I even did a podcast interview with California’s State Monitor, Katherine Porter, who I think very highly of and was sure would help make sure California’s homeowner got what they deserved under the National Mortgage Settlement.


Like everyone else, I was focusing on the wrong things like how the bill made it illegal to dual-track, which is when a servicer continues the foreclosure process even though the homeowner is in the loan modification process.  And it created a “private right of action, “which would mean that under certain circumstances a homeowner would have the right to sue for violations of the HBR, even specifying damages of $7,500 in some and $50,000 in other instances.


Honestly, those numbers should have set off all sorts of alarm bells a-ringing in my head, but for whatever reason it was months later before I started to put two and two together to make four.  When I recently started reading the headlines about how the numbers of California foreclosures were falling fast… and saw that in the fourth quarter of 2012 DataQuick reported that foreclosure filings fell by 32.4 percent when compared with the prior year… that’s when I had to pause and say… “Say what?”


I’ve covered this subject for four years plus now, and my brain is pretty much hard wired with statistics on the housing market at this point, so as one might imagine, drops like that when nothing substantive has changed ostensibly… bother me… a lot.  What could have possibly caused trustee deeds filed on California properties to have fallen by roughly a third over 2011, a year when things were slowed down by the robo-signing scandal and National Mortgage Settlement already?


Something was fetid in Fresno, as they say… (well, they say “rotten in Denmark,” but the Fresno things works too, I think.)


I had read the new HBR backwards and forwards, up and down, and in and out and while it did provide some fairly onerous provisions, it wasn’t like it would be easy to take down the mortgage servicing industry as a result of it becoming state law, at least not from how I was reading it… and the numerous attorneys I asked about it seemed to be in agreement.  Yes, it would likely increase the amount of litigation, but it wasn’t going to make checkers into chess, as far as all the experts I consulted with were concerned.


But what was causing the precipitous drop in foreclosure activity in California, I still needed to know.


Well, a little research and sure enough I found that the California Homeowner’s Bill of Rights (also referred to as Senate Bill 900) was being referred to by those in the default servicing industry as, “perhaps the most devastating Senate Bill to hit our industry in decades.  It will likely put many firms and suppliers out of business.”  


Hmmm… I thought… awfully melodramatic prose for an industry that for over a year referred to “robo-signing” as “dotting i’s and crossing t’s” and fraudulent affidavits as “shoddy paperwork.”  Why would this group now be saying that California’s HBR would cause such a dramatic outcome?


And then it became clear to me… it wasn’t the servicer standards… it wasn’t even what the bill demanded of servicers in the way of requirements and deadlines.  Nevada’s bill flashed in my head and I remembered Nevada attorney Tisha Black, who had helped draft Nevada’s AB 284, explain to me that AB 284 didn’t even make something illegal that wasn’t already illegal… but there was that $5,000 fine… that part was new… hmmm… it was all starting to fit together.


I wondered… how much does a law firm that handles foreclosures in non-judicial states get paid per foreclosure?  It had to be less than such a firm would be paid in a judicial foreclosure state, right?  Of course it did… less work… less pay.


It wasn’t the law that had stopped Nevada’s foreclosures so abruptly, it was the potential liability… the potential of being fined $5,000 and criminally charged if something weren’t done right that had done it.  I mean… what if I offered you $1200 to handle a foreclosure for me, but all of a sudden a state law made it potentially something that could end up costing me $5,000?  How many would you want to do for $1200, if you could potentially lose $5,000 on each one?  Not many, no question about it.


And California’s HBR was much worse in terms of POTENTIAL liability… it could cost a party attempting to foreclose $50,000 under the worst of circumstances.  And not only that, but California’s HBR said that if the homeowner was granted a Temporary Restraining Order, or TRO, to stop a foreclosure or trustee sale… frankly something not all that difficult to do… then the homeowner would be awarded legal fees even if not awarded other damages… and that alone could be tens of thousands of dollars or even more.


Yes sir, sure enough I found various quotes from law firms who serve the mortgage servicing industry saying things like… “Large or small servicer, or a private individual investor, all are affected by this California law governing foreclosures, by creating tremendous liability for the default servicing industry.  It creates loopholes for homeowners and their attorneys to prevent enforcing payment of the debt.”  


The servicing industry was seeing the writing on the foreclosed wall.  According to one default servicer who recently announced they would not longer be handling foreclosures in California as a result of the HBR…


“This is not just a compliance bill, requiring new workouts with the borrowers. HBR was clearly designed to stop foreclosures as we know them and punish every Lender, Servicer and Trustee for not doing a workout with the home owner.”


And, Robert Jackson, Esq. referred to as a 40+ year veteran in the mortgage servicing industry, wrote the following conclusion regarding Senate Bill 900:


“The Homeowner’s Bill of Rights” (HBR) truly is the legal equivalent of a 9.9 earthquake for the default servicing industry.  In general, it turns every California non-judicial foreclosure from a contract-based claim with little chance of success, little practical liability exposure, and very modest legal expenses into the equivalent of a personal injury claim, with significant legal expense exposure and potentially significant liability exposure.  

 In the world of “personal injury”, whether or not a loan servicer or a foreclosure trustee actually followed the HBR is almost entirely irrelevant.  The issue is instead whether or not a jury will believe, and care, that it did.”


Ladies and gentlemen… I had a BINGO!  


California’s HBR wasn’t scary because of what it mandated on the surface, it was a “9.9 earthquake” because of its potential liability.  Which law firm would want a job paying $1200 or even $2,000 to handle a foreclosure that could result in liability of tens of thousands of dollars even if very little was done wrong.  I mean, foreclosure law firms may be a lot of things, but stupid isn’t one of them, and they know they’re not likely to be loved by juries these days.


Then I started looking around to see how the California law firms that offer to represent homeowners were talking about the HBR and sure enough they were starting up their marketing engines.  A training academy of sorts, operating under the troubling name of, “Certified Forensic Loan Auditors,” was even advertising a seminar being given by two attorneys for “only $795,” Patricia Rodriguez and Chad Elrod, on the new Homeowner Bill of Rights.


And their advertisement, after listing all the things about the HBR that would be covered, at the bottom said the following…


“Borrowers can sue mortgage servicers for injunctive relief before the trustee’s deed upon sale has recorded, or if it has already recorded, to sue for actual economic damages, if the mortgage servicer has not corrected any “material” violation before the trustee’s deed upon sale recorded.  If a court finds that the violation was intentional, reckless or willful, the court can award the borrower the greater of treble (triple) damages or $50,000.  Court may award reasonable attorney’s fees and costs to borrower as the prevailing party.”


However, I don’t think they totally got the real implication of the HBR because all they did there was cut and paste and under the heading, “Lenders defense:” it said only, “Compliance,” and that wasn’t really the most salient point, as I now very clearly understood.


The same servicer law firm that I quoted above also recently said the following in some correspondence… intended to be confidential… and I am sorry about that… with mortgage servicers…


“Many attorneys whom I have spoken with have said that litigation firms are advertising heavily to entice new attorneys to join their firms to help with the coming wave of litigation to be filed against Lenders, Servicers and Trustees.   In this current economic environment, we all have become the targets and should brace ourselves for a barrage of borrower lawsuits.”


They also made my job that much easier by providing an example of a solicitation received by one of their customers telling them that their law firm can now stop the foreclosure process without the borrower ever filing bankruptcy, as follows…


“HBR creates a new area of litigation and liability TO EVERY PARTY INVOLVED in  a non-judicial foreclosure on a first trust deed, owner occupied, single family residence, starting January 1, 2013.  HBR states that litigation is to include all parties involved with the enforcement of the Deed of Trust (Lender, Servicer, and Trustee) as shown in…”


And then they explained more subtle points including that under the HBR, each party is jointly liable with the other party, EVEN IF THEY DID NOTHING WRONG.  And yes, I could offer more specifics on this and other points, but hey… I don’t want to help scammers, nor do I want to take away all the fun lawyers will have figuring things out on their own… or maybe I should hold my own seminar… LOL.


The real point is that then they said the magic words, not that I needed to hear them from them at that point in my journey of discovery…


“The only exemption from the HBR requirements, thus avoiding litigation and liability, is to file a Judicial Foreclosure on all first trust deeds on single family residences which are owner occupied.”


NOTE: If I could figure out how to make that music from Star Wars start playing right now, I would, so please click that link for added effect.


They even went on to explain what the average servicer would likely be thinking at that very moment…


“Your initial thought might be that a Judicial Foreclosure takes too long and is very expensive.  However, consider what it costs on a monthly or annual basis to defend a single lawsuit.  Then factor in additional costs if you lose, and being required to pay all attorney fees and expenses for the borrower, and HBR’s minimum $50,000.00 fee that may be awarded by the judge for simply having an injunction filed.  Even if you win the suit and there was no wrong doing on any one’s part, how much in attorney fees will be spent in a course of a year or so, to prove this?  All expenses incurred in your defense are also non-recoverable.”


Yes, all very good points related to the potential use… or misuse, depending on your vantage point… of the new California HBR.


They went on to point out that the simple and highly disturbing fact about the California HBR is that if a law firm or servicer handling the foreclosure is sued by the borrower for any claimed HBR violation, the claim can only be proven at trial… an attorney cannot just Demurr the action away.


So, they warned their mortgage servicer clients, “Basically get ready for a long costly trial, even if nothing on anyone’s part was done wrong.  Most likely the borrower’s attorney will suggest that you settle out of court for thousands of dollars, just to avoid the time and high costs of a trial.  Remember, we are all jointly liable in this action.”


And the HBR not only affects owner occupied first trust deeds, but every foreclosure starting January 1st with the introduction of having to prove “Standing” (proving that you have the legal right to enforce the debt), and this also applies to unlawful detainer actions, which are used when trying to evict someone or otherwise gain control of the property after a foreclosure sale.


Taken to its furthest limits, one law firm that represents servicers even went as far as to say…


“A major deterrent to us, purposely designed into the HBR, will help the borrower never lose their home.  The new bill gives every borrower the legal right to request a Modification at any time prior to the Trustee’s Sale being conducted, thus stopping the foreclosure sale and then repeating the process so the sale can NEVER be held.”


Well, “never”… as my mother used to tell me… is a very long time.  But, the point is nonetheless well-taken.

Several firms that have represented servicers and investors in California for decades have already notified their clients that they will no longer be handling non-judicial foreclosures in our state, as they explain, the new HBR, “imposes tremendous liability upon anyone who has the desire to continue a non judicial foreclosure.”  


Some have already notified their clients, including servicers, investors and others, that because of the California HBR, “it is in their best interest to avoid this litigation cesspool by not proceeding or filing non-judicial foreclosures on residential, 1st Trust Deeds, owner occupied properties, starting January 1, 2013 in California.”


I could show you the step by step process built into the California HBR that some say allows the borrower to legally delay the sale indefinitely, but for one thing, I’m not here to help scammers figure anything out that will help them defraud homeowners, and for another, who am I to deprive lawyers of the challenge involved in solving that kind of legal puzzle?


Maybe later… if homeowners are interested, but like I said… it isn’t likely to matter very much anyway,  because just as those in the industry have stated, thus reinforcing my conclusion yet again…


“California lawmakers are forcing us to become a judicial foreclosure state like so many others in the country.  It will simply be too costly to file a non-judicial foreclosure on a first trust deed, single family home that is owner occupied.”


So… even though many may still tell you that California is a non-judicial foreclosure state… they’re wrong and I’m calling it now… for all intents and purposes California’s future is as a judicial foreclosure state.  By the way, I asked several servicers about this and none said they’d heard anything about what I’m talking about… lol.


Okay, if you say so.  But it’s me we’re talking about here and I’ve just been around too long at this point… and besides that… maybe it took me longer than it should have but still… the boy’s wicked smart.


The real question everyone should be asking is… 


Does California becoming a judicial foreclosure state represent a good or bad thing for the state’s homeowners? 


And I think I’ll save that discussion for next time, so stay tuned…


Mandelman out. 




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