California SB 1079 Summary (updated 9/29/20)
SB 1079 has passed the California House and Senate and was signed by Gavin Newsom on 9/28/20.
This will impact all trustee sale buyers in California and now goes into effect on January 1, 2021.
SB 1079 introduces a 45-day redemption period in the California foreclosure process, during which you can be outbid by an “eligible” buyer. Under the bill, you do not receive interest on your funds during that period, may be responsible for holding costs, and face fines for vacancy and blight.
The authors say SB 1079 is needed to address three issues. We disagree.
Below is the analysis we put on leading up to Newsom’s signing. While we believe this bill was well-intended, their analysis used flawed assumptions, poor analysis, and inapplicable data. Below we leave this to read and understand how this bill will impact your business.
Vacancy. The bill suggests that there is a significant problem around vacancy after foreclosure. We find this only to be true as a necessary part of the foreclosure process. Most foreclosures are cleaned up and resold, with approximately 95% going to homeowners in less than one year.
The process to take possession, cleanup, and resell a property takes third-party investors, on average, 154 days and banks 278 days. With the exception of the time during eviction where the prior owner or tenant occupies the property, it needs to be vacant for most of this process. Property cleanout, repairs, marketing, and escrow all take time, but this time is reasonable based on the averages above. The data clearly shows that this process of rehabilitating these properties serves to improve neighborhoods and homeownership.
Their analysis cites a study from Cuyahoga County, OH that says that vacancy after foreclosure is a significant problem. That was true in Cuyahoga County because people simply moved away. The county has steadily been losing population to migration since the 1970s and well before the Great Recession. The State of Ohio spent over $239 million demolishing homes. The study has zero relevance to California. There is absolutely no data to suggest the same problem occurred here, and lots of data to the contrary.
Furthermore, Ohio is a judicial state, unlike California. Judicial foreclosures take more time as they are processed through the courts. Studies have shown that longer foreclosure processes lead to slower housing market recoveries.
Decline in homeownership. The bill suggests that the foreclosure “process” caused a decline in homeownership. The loss of homes to foreclosure and the ensuing damage to millions of homeowners credit undeniably played a huge roll in the decline of homeownership, which has zero to do with the process itself. But rather than acknowledge this simple and obvious fact, the bill analysis places the blame on institutional investors, citing Blackstone’s purchase of 13,000 homes and converting them to rentals. Our analysis shows that less than 8% of foreclosures between 2007 and 2013 are currently owned by business entities. The analysis cites Blackstone’s purchase of 13,000 properties as an example of the impact to homeownership, but fails to note that this represents a tiny fraction of the almost 1.1 million foreclosures that occurred. Given the destroyed credit of homeowners and their inability to repurchase a home, we believe home prices would have fallen much further without investors’ entry to clean up and rent foreclosed properties.
Blight. Many anecdotal stories of blight due to foreclosure were written during the crisis, including the one cited in the bill’s analysis. With over one million foreclosures from 2007 to 2013, a few properties were sure to fall through the cracks, especially as banks became overwhelmed early on. However, our data suggests that this problem was in no way widespread. Of those foreclosures, 70% of those are now owner-occupied. With only 8% corporate-owned, even the vast majority of rentals are currently owned by mom-and-pop investors.
The unintended consequences of SB 1079.
Rather than fixing these non-existent issues, we instead believe that SB 1079 will have the following unintended consequences.
Homes vacant longer. Trustee sale investors can’t take the risk of doing the research required for foreclosure investing and paying cash upfront, only to be outbid after the fact by “eligible bidders” who took zero risks. As a result, more foreclosures will go back to the banks, who take far longer to rehab properties than investors - 278 days vs. 154. That’s months longer until those homes are fixed up and resold to homeowners. Further, banks invest far less on improvements, compared to investors, which will impact those neighborhoods.
More corporate-owned properties. Banks are more likely to sell foreclosed properties (REO) in pools to corporate investors. As we expect nearly all current trustee sale investors to exit the market, far more properties will likely go back to the bank, dramatically increasing the purchases by large corporate entities.
Less money recovered by homeowners. With no investor interest at the trustee sales to create a competitive bidding environment, few properties will see a bid over the amount due to the lender. Bids for more than the amount owed, which is increasingly common, creates excess proceeds that are returned to the homeowner. This bill steals those proceeds from these former homeowners at the time they need it most.
Less homeownership. Most properties purchased by today’s trustee sale investors are quickly flipped to homeowners. This bill instead promotes sales to “eligible bidders” including nonprofits and government entities. And, as stated above, will likely increase ownership by corporate entities. This bill is directly at odds with its stated goal of improving homeownership.
Legal
Updates SECTION 1. Section 2924f of the Civil Code
Stories
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- Senator: Let’s stop another Wall Street takeover of California homes
- In brief: Nancy Skinner’s bill would help tenants, groups, cities buy vacant homes
- New California bill draws inspiration from Moms 4 Housing
Opposed: American Financial Services Association, California Association of Realtors, California Bankers, Association, California Chamber of Commerce, California Credit Union League, California Land Title Association, California Mortgage Association, California Mortgage Bankers Association, National Rental Home Council, United Trustees Association
Supported: Asian, Inc., Bend the Arc California, California Coalition for Rural Housing, California Community, Economic Development Association. California Low-Income Consumer Coalition, California Reinvestment Coalition, California Rural Legal Assistance Foundation, City of Oakland, Community HousingWorks, Consumer Advocates Against Reverse Mortgage Abuse, East Bay for Everyone, East Bay Housing Organizations, East Los Angeles Community Corporation, Esperanza Community, Housing Corporation, Fair Housing Council of San Fernando Valley, Faith and Community, Empowerment, Greenlining Institute, Haven Neighborhood Services, Home Preservation and Prevention, Inc, Homeownership San Francisco, Housing California, Inclusive Action for the City
Institute on Aging, Jakara Movement, LA Forward, Mission Economic Development Agency, Neighborhood Partnership Housing Services, Inc., New Economics for Women, Non-Profit Housing Association of Northern California, Oakland City Council, Opportunity Fund, Public Counsel
Public Law Center, Renaissance Entrepreneurship Center, Richmond Community Foundation, Richmond Land, Simi Valley Democratic Club, Sustainable Economies Law Center, TechEquity Collaborative, Tenants Together, The Two Hundred, Urban Possibilities, Urban Strategies Council
Western Center on Law & Poverty.