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Trustee Sale Buyers at Risk From SB1079. ALERT!

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

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.

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Did Newsom sign this?

Yes, he did on Monday with a number of other real estate related bills.

  • AB 434: Housing financing programs: uniform procedures.
  • AB 725: General plans: housing element: moderate-income and above moderate-income housing: suburban and metropolitan jurisdictions.
  • AB 831: Planning and zoning: housing: development application modifications.
  • AB 1561: Planning and zoning: housing element and entitlement extensions.
  • AB 1851: Religious institution affiliated housing development projects: parking requirements.
  • AB 2345: Planning and zoning: density bonuses: annual report: affordable housing.
  • AB 3182: Housing: governing documents: rental or leasing of separate interests: accessory dwelling units.
  • AB 3308: School districts: employee housing.
  • SB 288: California Environmental Quality Act: exemptions: transportation-related projects.
  • SB 940: Housing Crisis Act of 2019: City of San Jose.
  • SB 1079: Residential property: foreclosure.
  • SB 1148: Mortgages and deeds of trust: foreclosure.
  • SB 1157: Tenancy: credit reporting: lower income households.
  • SB 1190: Tenancy: termination.
  • SB 1212: Joint powers authorities: San Gabriel Valley Regional Housing Trust: board of directors.
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When does it go into effect?

New rules go into play starting January 1, 2021. If you’re buying at trustee sale, we are interviewing Michael Belote for our podcast that will air on October 8th. SB 1079 did a few things that really changes the business that we plan to discuss.

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Wow, will courthouse step buyers stop buying?

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Hard to imagine buyers doing all that leg work just to have some government entity or homeowner come in and swoop it up. Maybe they’ll just focus on buying after the sale when you know you’ve got clear title and the banks are forced to deal with any unrecorded liens. I hear that’s a concern and weird the bill doent spell out who would pay for that.

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The last one I had to negotiate from the city of Riverside was over $40,000. It was unrecorded liens that showed up after our company purchased at trustee sale. I am very curious to understand the expectation of this layer of risk. Right now, the new eigble buyer that’s an owner occupant only has to offer what the trustee sale buyer purchased for. If there are lies, fines, and other costs, will they have the ability to pay?

Thanks for posting, by the way.

Hi Aaron, Who or what is an “eligible buyer”?

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Howdy Juan Carlos! This is what SB 1079 considers an “eligible bidder”:

(3) “Eligible bidder” means any of the following:

  • (A) An eligible tenant-buyer
  • (B) A prospective owner-occupant.
  • (C ) A nonprofit association, nonprofit corporation, or cooperative corporation in which an eligible tenant buyer or a prospective owner-occupant is a voting member or director.
  • (D) An eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing.
  • (E) A limited partnership in which the managing general partner is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable housing.
  • (F) A limited liability company in which the managing member is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing.
  • (G) A community land trust, as defined in clause (ii) of subparagraph © of paragraph (11) of subdivision (a) of Section 402.1 of the Revenue and Taxation Code.
  • (H) A limited-equity housing cooperative as defined in Section 817.
  • (I) The state, the Regents of the University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state.

Before everyone gets very excited about creating a nonprofit to buy, remember you’ll have a board that can fire you. Shell nonprofits are also a huge red flag.

Wow. That changes a few things.

Please see the response to who is responsible for damage during the 45-redemption period.

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Non profit investment and asset management has become very sophisticated in the past 15 years. HUD/FNMA/Freddie have had non-profit carveouts for past 10 years on the NPL and REO sales. This is not new, has been happing at the federal level for a long time the only difference is the fed deals are large, non-profits spending anywhere from $1mm to $15mm in a single transaction. There won’t be fraud, non-profits won’t deploy capital without doing their DD, it is very efficient way to promote neighborhood stabilization and affordable housing. I’d like to hear your thoughts, lamaya@nscm.us

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Do you see a lot of federal money lining up for these kinds of initiatives? SB 1079 is a California specific law, are other states developing similar protocols? Do you only operate in CA?

No federal money, but there are federal non-profit carve outs when HUD sells NPLs and REO as well as FNMA/Freddie. For example, in the last HUD HECM auction in June totaled about $650mm in vacant NPL, non-profit carve out was 10%, so about $70mm. 3 non-profits ended splitting the carve out spending about $40mm combined. I do believe other states will follow CA’s lead, affordable housing is a serious problem in CA, non-profits tend to try to sell to underserved potential buyers and also many have lending programs or forgivable silent seconds to offer. Non-profits in this space have sophisticated technology, trading desks and secondary markets capability. I expect the new law will be very successful.

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Are there national groups or collectives we should be following?

Iamaya - can you point to some non-profits that are doing this well. Unfortunately, even if you are right and non-profits do a good job, this particular law is an absolute disaster. For example, it is totally silent on how bidding after the sale works. It also assumes investors will continue to bid to set a base price, but leaves them in a terrible position post-sale where they have to maintain the property, but won’t get reimbursed if they do and one of these qualified bidders win. What that means - period without question - is that many of these homes will sit vacant longer. That was supposed to be one of the things this law fixed. So many more problems as well.