The California State Legislature recently enacted the Senate Bill 1137 into Law. The bill is set in place to provide relief from the adverse effects of the high rates of foreclosures in California. Here are the basics, which are in effect until January 1, 2013:

 - Lenders are required to contact homeowners at least 30 days prior to filing a notice of default (the first step in the foreclosure process) to explore options for avoiding foreclosure - effective on or about September 8, 2008

- Owners acquiring property through foreclosure must maintain the exterior of the building if it’s vacant - effective July 8, 2008

- Tenants of homes being foreclosed on now have 60 days (up from 30 days) to vacate the property, unless other laws apply - effective July 8, 2008

So the foreclosure process is this - A homeowner falls behind on their payments (one month, three months, ten months, the rules depend on the lender) & the lender retains the right to file a Notice of Default (NOD). This is where the first part of the new law makes a change. The lender is now required to attempt some other resolution with the borrower at least 30 days prior to filing the NOD. After the NOD is filed, the homeowner has 90 days (3 months) to either bring their payments current or some other form of financial restitution to the lender (i.e. refinancing) or they can file for bankruptcy.

After that period the lender may file the Notice of Trustee Sale (NOTS), which is the notification that the home will sell at public auction typically at the local courthouse. From the time the NOTS is filed the lender must wait another 20 days before they can actually put the home on the auction block. The process was a minimum of 110 days from the time the NOD is filed prior to the new law. Now with the extra 30 days prior to when the lender can file the NOD the timeline is extended to a minimum of 140 days.

Contact between the Lender & Borrower - The effect:

Presumably this will minimize the number of foreclosures as lenders are now forced to contact the borrower to find some remedy other than foreclosure. For reference, California has the highest volume of foreclosures than any other state in the country with 71,930 Notices of Default filed year-to-date. If this helps put a tourniquet on the market then, again, presumably, the prices in the market will begin to level off. Economists argue both sides of this; in fact, there’s an equivalent bill being tossed between the US House of Representatives & the Senate where the argument is debated. California went ahead with the law so we shall see what the effect will be in the months/years to come.

Maintenance of Vacant Properies - The effect:

If a house is not sold to an owner occupant at the foreclosure auction then the house often goes back to the bank and then becomes a REO Foreclosure & is put on the market by the bank. This is what is known in the market as a “Foreclosure” or “REO”. In this case the new owner (the bank) is required to maintain the exterior of the house, take action against trespassers or squatters, and clean & maintain standing water to prevent the proliferation of mosquitoes, & other public nuisances. If they do not comply with this section of the law they are liable to fines to the tune of $1,000 per day they don’t comply. The presumed effect here is to keep property values from dropping further. Some argue that this will effect lenders due to increased & required costs which will effect the lenders’ bottom line & potentially devalue stock prices, which in turn may further negatively effect the market.

60-Day Notice for Tenants to Vacate - The effect:

Tenants now have more time to vacate their rental unit should it fall into foreclosure, which will further lengthen the process of foreclosure. The hope here is that the longer banks have to wait until they foreclose on a property the more time there is to remedy the situation by other means. There are arguments saying that given the state of our economy it doesn’t matter how long it the process of foreclosure takes, if someone’s going into foreclosure there’s little they can do to avoid it.

Overall: we’ll have to just wait and see the effects of such legislation. Again, the argument from economists is either do something (like enact laws of this sort to help slow the bleed) or do nothing (i.e. let the market correct itself; we created this mess, the mess will correct itself ala Adam Smith’s theory of economics).