As California home prices continue to fall heading into 2023, more and more homeowners owe more on their mortgage principal balance than their home’s equity. In other words, homeowners are increasingly falling underwater.

Besides the blight on the balance sheet, underwater homeowners face a nearly insurmountable hurdle when the need to sell or relocate arises. Their underwater status prevents them from selling and relocating — unless they are able to negotiate a short sale with the lender. Otherwise, the underwater homeowner’s only other option is to default, forces the lender to foreclose.

Beginning January 1, 2023  Assembly Bill (AB) 1837 and AB 2170 will build upon 2020’s Senate Bill (SB) 1079 to ensure large-scale investors aren’t first in line to profit during the upcoming foreclosure wave.

AB 1837 extends the 1079 process through January 1, 2026.

Under the 1079 process, trustees are to sell foreclosed homes individually rather than in bundles (when multiple homes are sold as a package). These new laws address fraud and make operational improvements to ensure more tenant- and prospective owner-occupants are able to purchase at trustee sales.

AB 2170 clarifies a bundle sale to mean the sale of two or more real estate parcels containing one-to-four residential units, of which at least two have been acquired through foreclosure.

When an entity or person annually forecloses on 175 or more residential properties, they are to give eligible bidders the first opportunity to purchase properties. In the first 30 days after a property is listed, trustees may only accept offers from eligible bidders, including:

  • prospective owner-occupants;
  • nonprofit corporations;
  • California community land trusts;
  • limited-equity housing operatives; and
  • public entities.

On the last day of eligible bids, a trustee may not accept a bid sent by uncertified or overnight mail.

Along with the offer to the trustee, foreclosure bidders are to submit a declaration stating they are an eligible bidder. To reduce incidents of fraud, eligible tenant buyers are required to attach evidence of their tenancy with their declaration.

Bids are limited to a single amount and may not include escalation clauses, or instructions for successively higher bids.

Further, before considering any other offer, the trustee needs to respond in writing to all offers from eligible bidders during the first 30 days of the property being listed for sale.

Additional foreclosure requirements for eligible bidders

After the sale of a foreclosure property, a trustee is limited to deducting a fee of $200 or 1/6 of 1% of the unpaid principal loan balance secured by the foreclosed property — whichever is greater — from the eligible bidder.

Within 15 days of the sale of property to an eligible bidder, the trustee needs to send information about the sale to the Attorney General, including the:

  • winning bidder’s name;
  • address and parcel number of the property;
  • copy of the trustee’s deed; and
  • attached declaration of eligible bidder status.

Further, evictions are prohibited in homes acquired through SB 1079 and units are to be sold or let at an affordable cost for lower income residents.

When a property is purchased by a private entity, the property needs to be sold at an affordable housing cost or rented at an affordable rent for a period of 30 years from the date the trustee’s deed is issued, defined as:

  • 30% of 15% of the area’s median income for acutely low-income households;
  • 30% of 30% of the area’s median income for extremely low-income households;
  • 30% of 50% of the area’s median income for very low-income households; or
  • 30% of 70% of the area’s median income for low-income households. [Calif. Health and Safety Code §50052.5(b); 50053(b)]

These provisions may be enforced by:

  • the California Attorney General;
  • a county counsel;
  • a city attorney; and
  • a district attorney.

For more updates on new laws pertaining to foreclosures, subscribe to the firsttuesday newsletter, Quilix!

Related article:

Foreclosure requirements shift in California