This article is part II of a two-part series covering the California’s Tenant, Homeowner, and Small Landlord Relief Stabilization Act of 2020. This second part reviews mortgage foreclosure restrictions created by the TRA. For part I, click here

Mortgage lender foreclosure restrictions

A moratorium has been placed through February 1, 2021 on the eviction of residential tenants and the collection of rent that became due and unpaid during the period of March 1, 2020 to January 31, 2021 under the Tenant, Homeowner, and Small Landlord Relief Stabilization Act of 2020 (TRA).

As a matter of public policy, the TRA intends to maintain the status quo for tenant occupancy and shelter during the pervasive financial distress brought on by the coronavirus (COVID-19) pandemic of 2020.

Similarly, the TRA also extends foreclosure protections to owner-occupants of a home and residential landlords who own four-or-less dwelling units secured by a first trust deed mortgage. It also extends other protections under prior legislation called the Homeowners’ Bill of Rights (HBOR).

For small residential landlords to qualify for relief from lender interference, at least one tenant who occupies the landlord’s property needs to be delinquent on rent that became due during the moratorium period. This is documented by the tenant’s declaration of their reduction in income related to the COVID-19 pandemic. [Code of Civil Procedure §2924.15(a); see part I of this series]

Landlords who own five-or-more residential units are not protected by the TRA.

At least 30 days before a mortgage servicer or lender may start the foreclosure process, they are to contact the delinquent homeowner or small landlord and explore options to avoid foreclosure, called a foreclosure avoidance assessment.

The servicer may:

  • advise the homeowner or small landlord at their first contact of their right to request another meeting about foreclosure within 14 days; or
  • discuss the homeowner’s or small landlord’s right to authorize a lawyer, Department of Housing and Urban Development (HUD)-certified housing counseling agency or other advisor to talk on their behalf with the servicer about ways to avoid foreclosure.

If the homeowner or small landlord and mortgage servicer do not work out a plan to avoid foreclosure within 30 days, the servicer or lender may start the foreclosure process by recording a notice of default (NOD).

Within five days after recording an NOD, the mortgage servicer or lender needs to provide information to the homeowner or small landlord about options available to terminate the foreclosure process. [CCP §2923.55, 2924.9]

A homeowner or small landlord with a federally-backed mortgage may also request forbearance by the mortgage servicer to avoid foreclosure under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act.

A federally-backed mortgage is owned or guaranteed by:

  • Fannie Mac;
  • Freddie Mac;
  • the Federal Housing Administration (FHA);
  • the U.S. Department of Veterans Affairs (VA); or
  • the U.S. Department of Agriculture (USDA.

To initiate foreclosure protections under the CARES Act, the homeowner or small landlord first contacts the mortgage servicer – the company where mortgage payments are sent. [CCP §3273.10(d)]

A mortgage servicer who denies a forbearance on any mortgage owed by a homeowner or small landlord is to provide a written explanation detailing why the forbearance request was rejected when the homeowner or small landlord meets the following conditions:

  • they were current on mortgage payments due on or before February 1, 2020; and
  • they are experiencing financial hardship which prevents them from making timely mortgage payments, directly or indirectly due to the COVID-19 pandemic. [CCP §3273.10(1)(2)]

The servicer’s written notice of rejection of the borrower’s forbearance request is to:

  • specifically identify any curable defect in the written notice, such as an incomplete application or missing information;
  • provide the homeowner or landlord 21 days from the mailing date of the written notice to cure the identified defect;
  • accept receipt of the homeowner’s or landlord’s revised request for forbearance before the 21-day period lapses; and
  • respond to the homeowner’s or landlord’s revised request within five business days of receipt of the revised request. [CCP §3273.10(b)]

The mortgage servicer’s communications of forbearance and post-forbearance options are to be conducted in the language the servicer regularly uses to communicate with the homeowner or landlord. [CCP §3273.14]

Mortgage servicers are required to file the forbearance denial notice along with the declaration when recording an NOD to start the foreclosure process.

Homeowners and small landlords harmed by a servicer’s violation of the forbearance and foreclosure communication requirements may file an action for injunctive relief, damages, restitution and any other remedy to redress the lender or servicer’s violation. [CCP §3273.15]

HBOR also imposes dual tracking restrictions on the lender. A mortgage servicer or lender needs to temporarily halt the foreclosure process while deciding whether to accept or reject a completed mortgage-modification application until after it gives the homeowner or landlord time to appeal a denial.

Also, a servicer may not foreclose while the homeowner or small landlord is complying with the terms of an approved loan modification, forbearance, repayment plan or other foreclosure-prevention option. [CC §2923.6, 2924.11]

The small landlord and homeowner protections under the TRA remain in effect until January 1, 2023.

Local ordinances provide additional protections

Several counties and cities in the state have adopted their own local eviction moratoria ordinances in response to the COVID-19 pandemic, including moratoria on the collection of delinquent rent.

To set a statewide standard, local ordinances in effect on August 19,2020 which set the time period for a tenant to pay COVID-19-related delinquent rent are modified as follows:

  • When the payment of COVID-19-related delinquent rent was to commence on or before March 1, 2021, the ordinance may not later extend commencement of the collection of the delinquent rent.
  • When the payment period was set to commence after March 1, 2021, the COVID-19-related delinquent rent payment period now begins March 1, 2021.
  • When the time period was set for a tenant to pay COVID-19-related delinquent rent, the ordinance may not later extend the collection period and the collection period may not be extended later than March 31, 2022. [CC §1179.05]

Guidance for landlords

Landlords need to determine the best course of action for working with tenants and negotiating the payment of rent which is delinquent due to COVID-19-related financial distress.

Further, a significant percentage of tenants delinquent on rent payments due to COVID-19-related financial distress will not be able to pay whether or not the landlord pursues a court money judgment award.

Recall that going into this pandemic, rents across the more densely populated parts of California were eating up 50% of a tenant’s gross income. This is a stark distortion from the historic mean rent amount of 1/3rd of a tenant’s income. Recessions always bring on pricing adjustments to fit the income of the local population, as is occurring now.

Landlords are advised to consider negotiating with their tenants to agree on a reasonable month-to-month rental rate, taking into account both the COVID-19 pandemic and underlying 2020-2021 recession conditions.

The framework for this rent-adjustment discussion includes a reduction of 20% to 40%, or more, of rent due through February 1, 2021 – the point at which tenant eviction and rent collection protections expire. Thus, the tenant remains in occupancy and the landlord presently receives some amount of payment for the delinquent rent period through January 31, 2021 while the unpaid portion of the rent accrues to be paid another day.

Besides doing nothing, the alternative for the landlord is a vacant unit with no rent amount accruing owed by an occupant.

Worse, there are no sufficient prospects for a replacement tenant. The market will be flush with vacancies and very short on individuals and families who are able to pay rent for vacant units. This gap between able tenants and total rental units in the fall of 2020 may well be 15% to 20%.

To be diligent, landlords and their property managers need to retain a paper and digital trail of all communications with tenants, lenders, mortgage servicers and their representatives. The information trail includes copies of rent payment histories, telephone and messaging communications and notices sent to tenants or received from the tenant.

Without a file of information containing all interactions with a tenant, negotiating a solution with a tenant undergoing COVID-19-related financial distress, meeting with a legal assistant, or filing an action to collect delinquent rent will be chaotic and onerous.