For a total list of all the real-estate laws digested by first tuesday for the 2009 legislative session, click here.

Tax credit for purchase of single-family residence

Tax Code §17059
Added by S.B. 15:
Effective: February 20, 2009

A California Franchise Tax Board “income tax” credit will be given to homebuyers for 5%, limited to $10,000, of the purchase price on a single-family residence (SFR) that has never been occupied. The credit acts as a subsidy for builders and Real Estate Owned (REO) inventory of newly constructed homes. It does not apply to Multiple Listing Service (MLS) or For Sale By Owner (FSBO) resales. The credit against future taxes is received by the taxpaying homebuyer in equal amounts over three consecutive years, starting the year the purchase is made.

For a purchaser to be eligible for the tax credit:

  • the purchase must be made on or after March 1, 2009 and before March 1, 2010;
  • the purchaser must occupy the residences for at least two years, or the credit will be canceled and he must repay for any tax credit received;
  • the purchaser must certify in his tax return that the residence has never been occupied; and
  • the seller must certify the residence has never been occupied by reporting to the Franchise Tax Board within one week of the sale.

For SFR purchases involving more than one purchaser:

  • married individuals filing taxes separately are to divide the credit equally; and
  • two or more individuals are to divide the credit based on percentage of ownership.

For the ft take on this legislation, see first tuesday article “California new home credit application procedures”

As of July 2009, all tax credits under this law have been claimed.

California Foreclosure Prevention 90-day extension of 3-month NOD period

Civil Code §2923.52
Added by S.B. 7 & A.B. 7
Effective: June 15, 2009

Until January 1, 2011, a lender recording a Notice of Default (NOD) on a first trust deed originated between January 1, 2003 and January 1, 2008 and encumbering the borrower’s primary residence cannot record a notice of trustee’s sale (NOTS) until an additional 90 days have passed following expiration of the 3-month NOD period. Lenders may obtain an order of exemption from the Real Estate Commissioner. California state and local public housing agencies are exempt from the 90 day NOD extension. Other exemptions also appear as covered below.

Loan modification exemption from 90 day NOD extension

Civil Code §2923.53
Added by S.B. 7 & A.B. 7
Effective: June 15, 2009

A lender may apply to the Real Estate Commissioner and obtain an order of exemption if they implement a loan modification program which:

  • is intended to help the borrower retain his home;
  • aims to reduce the borrower’s debt-to-income ratio to 38% or less; and
  • includes some combination of the following:
    • interest rate reduction for a fixed term of five years;
    • an increase in the period of the loan term to no more than 40 years from the original date of the loan;
    • deferral of a portion of the principal until the loan reaches maturity;
    • a reduction of principal;
    • compliance with federally mandated loan programs; or
    • other appropriate factors determined by the Real Estate Commissioner.

A lender is not required to violate contracts for investor-owned loans or to provide loan modifications for a borrower who is not willing to pay.

Other exceptions to the 90 day NOD extension

Civil Code §2923.55
Added by S.B. 7 & A.B. 7
Effective: June 15, 2009

Lenders may disregard the 90-day NOD extension and record an NOTS if:

  • the borrower has surrendered the property;
  • the borrower has contracted with a company that advises on the foreclosure process; or
  • the borrower has filed for bankruptcy.

Requirements for loan modification programs to avoid 90-day NOD extension

Calif. Code of Regulations §2850.1
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

A loan modification program eligible for exemption from the 90-day NOD extension must conform to the Home Affordable Modification Program Guidelines or the Real Estate Commissioner’s minimum requirements.

Loan modification exemption from the 90-day NOD extension

Calif. Code of Regulations §2850.2
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

A lender applying for exemption must establish a loan modification program that applies to all loans in which:

  • the loan was recorded between January 1, 2003 and January 1, 2008;
  • the property is the borrower’s primary residence;
  • a notice of default has been submitted to the county recorder;
  • the loan is the first mortgage secured by the property and not encumbered by a subordinate lien;
  • the property is in California;
  • the borrower can demonstrate an ability to pay the modified loan;
  • the borrower has not surrendered his property;
  • the borrower has not contracted with a company that advises on the foreclosure process; and
  • the borrower has not filed for bankruptcy.

Availability of loan modification programs to borrowers

Calif. Code of Regulations §2850.3
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

For a lender to obtain an exemption from the 90-day NOD extension, the loan modification program must be made available to any qualifying borrower who notifies the lender of financial hardship.

All borrowers served with a notice a default must be notified of the loan modification program.

Programs exempting lenders from 90-day NOD extension requirements

Calif. Code of Regulations §2850.5
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

Any loan modified under the HOPE for Homeowners Program or the Home Affordable Refinance Program (HARP) meets the minimum requirements for a loan modification.

Lenders seeking exemption for loan modification programs not conforming to federal programs must demonstrate a loan modification program which:

  • demonstrates recovery potential based on discount rates, property values, costs of foreclosure, costs of modification, and the borrower’s ability to pay;
  • demonstrates the potential of borrowers to recover from foreclosure after a loan modification; and
  • is considered a long-term sustainable modification, where at least one of the following must occur:
    • a reduction in monthly payment for at least 5 years;
    • a housing-related debt to gross income ratio of 38% or less;
    • a back-end debt-to-income ratio of 55% or less after the modification;
    • the borrower successfully completes a 3-month trial period of the loan modification; or
    • the modification conforms to the Home Affordable Modification Program Guidelines, HOPE for Homeowners Program, or another federal foreclosure reduction program.

Where the net present value (NPV) of potential recovery with loan modification is greater than the NPV of potential recovery in foreclosure, the lender must provide a loan modification unless:

  • the borrower has no proof of his ability to pay; or
  • after loan modification, the borrower will still be unable to repay the loan.

A lender must target a 38% or lower housing-related debt-to-gross income ratio. For loan modification programs that do not achieve this ratio, a lender must demonstrate characteristics that support the borrower’s ability to repay the loan including:

  • assets;
  • a high income;
  • low consumer debt; or
  • any other characteristics that allow the borrower to repay the loan.

A loan modification program must include at least two of the following characteristics:

  • An interest rate reduction, for a fixed term of at least 5 years;
  • an extension of the amortization period for the loan to no more than 40 years from the original date of the loan;
  • deferral of a portion of the principal until the loan reaches maturity;
  • reduction of principal; or
  • compliance with a federally mandated loan modification program

Additional requirements for exemption from 90-day NOD extension

Calif. Code of Regulations §2850.6
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

If a loan modification consists only of a repayment plan which adds past due amounts to the principal and reamortizes to bring the loan current, the lender must prove that the borrower has a housing-related debt to gross income ratio of 38% or less and that the borrower can be reasonably expected to be able to repay the reamortized loan.

A lender must:

  • consider all eligible loans for modification;
  • make a reasonable effort to remove any encumbrances on the loan prohibiting modification, and to obtain waivers allowing modification from any parties necessary; and
  • ensure that any delays not caused by the borrower do not negatively impact the borrower in the loan modification process.

A lender that follows the time periods recommended in the HOPE NOW Mortgage Servicing Guidelines when evaluating a loan modification request is considered to be acting on a loan modification request in a reasonable time period.

If a borrower abandons the modification process or fails to provide documentation for the loan modification within two weeks of reviewing a request by a lender, the lender may decline the modification request and initiate foreclosure.

Application for exemption from 90-day NOD extension

Calif. Code of Regulations §2850.7
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

A lender is temporarily exempt from the 90-day NOD extension after filing a complete exemption application with the correct department. Filing an application with the wrong department does not result in automatic denial of the application.

An application for exemption will receive a temporary order exempting it from the 90-day waiting period before the NOTS. Within 30 days of receipt of the application, the Department will notify a lender whether his application meets the requirements for approval. If the Commissioner denies an exemption application, the lender will be immediately notified. The temporary order exempting the lender will remain in effect until 30 days after the date of the denial. A lender may submit a revised application.

Notice to Commissioner to alter loan modification program

Calif. Code of Regulations §2850.8
In compliance with S.B. 7 & A.B. 7
Effective: June 1, 2009

A lender may not alter its loan modification program after the lender receives a final order of exemption from the Commissioner, unless the lender informs the Commissioner of the alterations.

A change by the federal government to a federal program affecting home loan modifications will not constitute a change in a loan modification program.

Editor’s note — To read the first tuesday take on the California Foreclosure Prevention Act, see our article “Riverside Town Hall Discussion of the Foreclosure Prevention Act (ABX2 7)“