State Bar to Review Proposed Overhaul of Mortgage Code
In a move that could spark the most sweeping changes in state mortgage law since the Great Depression, a group of California lawyers will meet Tuesday in Los Angeles to consider a plan to bar lenders from seizing a homeowner’s assets to satisfy unpaid mortgage debt.
At its meeting at the Airport Hyatt, the California Bar Assn.’s Joint Committee on Anti-Deficiency Laws is also expected to consider a proposal to make it easier for lenders to go after commercial debtors and another that would streamline court-supervised and non-judicial auctions of property.
The proposals are part of a package of complex rule changes under study by the committee that could dramatically alter lenders’ and borrowers’ risk. They come at a time when some real estate property values are falling and when state and federal policy-makers are wrestling with ways to shore up the nation’s ailing financial system.
The California Bar Assn.--a private, nonprofit organization that licenses lawyers in the state--has no authority to impose its plan. But traditionally its proposals have been considered highly influential in the state Capitol, particularly on complex legal issues such as mortgage lending.
Under current law, California grants commercial and residential borrowers greater protection from so-called deficiency judgments as well as foreclosures than many other states. Unless a borrower refinances or takes out a second mortgage on his property, he is generally protected from having his assets seized by a lender to repay any money still owed after his property has been foreclosed upon by court order and sold.
Historically, lenders have almost never sought court-ordered deficiency judgments against either homeowners or commercial borrowers. What’s more, court-ordered foreclosures are often more costly and time consuming for lenders to obtain in California than they are in many other states. In Texas, for instance, a foreclosure can begin after less than three months of giving notice to the debtor. In California it take more than twice as long.
The Bar Assn. “thought the committee should take a more comprehensive look at whether California (mortgage) laws should be reformed,” said Patricia Frobes, the committee’s co-chairwoman. “We initially produced a (preliminary) report last April.” Since then, she said, there has been a lot of statewide interest in mortgage lending issues.
Following the multibillion-dollar losses incurred by the savings and loan industry in the 1980s, government and lending officials initially focused their reform efforts on finding ways to pay for the bad loans and tightening lending standards to avoid future loan defaults.
But as the recession increases the specter of foreclosures on the hundreds of billions of dollars worth of property that now backs mortgage loans nationwide, some experts are turning their attention to the complex and arcane world of recovering real estate from debtors and disposing of the property quickly.
“In a robust real estate market as we experienced in the 1970s and 1980s, lenders didn’t worry about foreclosures or deficiencies because there wasn’t a high probability that they would happen,” said Robert Edelstein, co-chairman of the Center for Real Estate and Urban Development at UC Berkeley. “That’s changed today.”
“It’s a very significant issue” in the lending community, added Christopher E. Chenoweth, general counsel for the California Banker Assn. “We are glad to see this proposal finally being brought forward to the front burner.”
The focus on mortgage reform is most acute in commercial real estate where, over the next few months, big insurance and pension fund lenders across the country may be forced to foreclose on large numbers of properties as an avalanche of short-term loans to developers comes due.
At Travelers Insurance Corp., for example, $1.4 billion in real estate loans will mature this year, up from $400 million in 1990.
“These mini-loans are a ticking time bomb,” said Perry S. Herst Jr., chairman and chief executive of Tishman West Cos., a Los Angeles-based developer and commercial property management firm. “Lenders are looking for a way out.”
Herst said some nearly empty office buildings have become such white elephants that “even lenders don’t want to take over these properties and operate them for a long time. They want to turn them over to someone else as quickly as they can.”
The 15-member Bar committee is expected to finalize its 48-page proposal this month. Once the committee approves a final draft, the plan will be voted on by the Bar’s board of governors and forwarded on to the state Legislature sometime this summer, said Ed Rabin, secretary of the Bar committee and a law professor at UC Davis.
