«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 393 quiry as to whether a particular borrower was available to continue to maintain the property or was the victim of fraud or sharp lending practices.250 What makes the matter even more inequitable is the fact that there likely are instances when the defaulting borrower did not inform his lender that he does not occupy the property due to an extended work assignment or vacation, that he has not kept up the property for a long period of time, that another person occupies the property without keeping it up, or that there is an unlawful occupancy. If the lender is not aware and does not maintain the property, the CVAPO’s strict liability provision would see to it that the lender incurs a fine that cannot be added to the borrower’s debt. Neither the fine nor the lender’s CVAPO-related costs would have occurred were it not for the borrower’s default and failure to communicate. In spite of the borrower’s liability for his breaches of the loan agreement, the lender is legislatively pronounced liable without any evidence the particular lender has breached the loan terms.251 Though local government may hold the power to apply strict liability to lenders, such an enactment is inequitable.
If the fine cannot be recovered as part of the debt through foreclosure, a lender will need to protect itself by periodic inspections for the life of the loan so that it is not caught unaware. Must this be done with every loan in the city? If not recoverable, lenders would be forced to take a loss or to fold the loss into higher loan costs. It is apparent that abandoned property ordinances can be applied in ways that are inequitable and unfair. The lack of justice in this way serves to further dilute the rule of law.
IV. THE CVAPO AND THE NONJUDICIAL FORECLOSUREA. Initial Considerations The critical predicate of this type of abandoned property ordinance enacted in Chula Vista and many other local jurisdictions is linked closely 250 The inquiry referred to here is not necessarily of each and every borrower, though that could be done once the borrower is located. Instead, this refers to a review of the data provided by such organizations as RealtyTrac or real estate and mortgage broker professional organizations regarding the number and types of loans, and identities of the lenders. Not all lenders applied the practices of Countrywide, Fremont, and others known for sharp lending practices. Nothing in the public record related to the passage of the CVAPO indicates there was any thought given to reinforcing the borrowers’ obligations under the loan, which the data may have indicated as appropriate because of the significant number of legitimate loans. The sense of urgency due to the number of foreclosures, without sound data to show negative impact, does not justify the release of borrowers from their contractual obligations. Instead, the city undermined the principle of personal responsibility. Putting aside the political ramifications, it would be interesting to learn the results of a study that examined whether Chula Vista or any local government was as aggressive in the enforcement of its public nuisance ordinances against borrowers as it was with abandoned property ordinances against lenders during the financial crisis.
251 CHULA VISTA, CAL., MUN. CODE § 15.60.110 (2013).
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to the state’s foreclosure statutory scheme in that the lender’s inspection, registration, and maintenance duties follow after the lender records a notice of default.252 If a notice of default is not recorded,253 the CVAPO is not applicable. The city’s recourse is solely against the owner–borrower or the occupant, but not the lender.254 Due to the city’s refusal to hold the owner– borrower accountable, the purposes of the CVAPO will be frustrated if the borrower does not maintain and keep secure the property.
A lender cannot in good faith record a notice of default unless it possesses factual support for a claim that the borrower has in fact defaulted on the loan.255 When it obtains the required information, the lender can proceed with the notice of default. If the borrower commits a monetary default, the lender is thus informed that it will need to take steps to meet the CVAPO obligations.
Given the definition of default in the CVAPO,256 the default could also be a breach of some other conditional promise in the loan agreement. Most deeds of trust include a residential borrower’s covenants to occupy, maintain, and keep secure the property, as well as not to abandon257 or commit waste at the collateral property.258 A lender could initiate a foreclosure based upon a borrower’s breach of one of these nonmonetary contractual promises.259 However, it is rare for a lender to record a notice of default under these circumstances. Moreover, borrowers that allow the property to fall into disrepair usually do not commit the type of acts that rise to the level of bad faith waste.
Lenders also analyze whether their borrowers are in breach of the loan agreement due to a violation of federal, state, or local law. If a borrower violates the law, a lender may initiate the foreclosure process when the viCHULA VISTA, CAL., MUN. CODE § 15.60.040 (2013).
253 A lender has discretion as to whether it will pursue its contractual remedy of foreclosure. See supra note 184, text regarding California-Single Family-Fannie Mae/Freddie Mae Uniform Instrument, Form 3005 01/01, § 9.
254 Lenders certainly want the collateral property to remain in good condition so that their security interest is protected, but poor market conditions and low property values may convince lenders to wait, or the lenders may do nothing simply because they are not aware of the situation at the property regarding its condition or occupancy.
255 What a lender cannot do under California foreclosure law is improperly and unfairly file a notice of default without a genuine default of the loan agreement terms. See, e.g., Whitman v. Transtate Title Co., 165 Cal. App. 3d 312, 323 (1985); In re Worcester, 811 F.2d 1224, 1228, 1232 (1987).
256 The CVAPO defines a “default” as “the failure to fulfill a contractual obligation, monetary or conditional.” CHULA VISTA, CAL., MUN. CODE § 15.60.020 (2013).
257 See supra note 214 and related text regarding vacancy. The CVAPO definition for “abandoned” states the property is “vacant” and the subject of a notice of default, which suggests default can be based on a breach of the owner-occupied, no-abandonment, or no-waste provisions of a deed of trust, and not necessarily because of a financial default. CHULA VISTA, CAL., MUN. CODE § 15.60.020 (2013).
258 See supra note 107 and related text regarding maintenance, security, and waste.
259 See infra note 260 and related text regarding the borrower’s default.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 395 olation of law is a default that creates an impairment of the security and exposes the property to a lien and forfeiture.260 Thus, a borrower who violates a public nuisance ordinance could be the subject of a foreclosure, but lenders infrequently proceed with a notice of default due to a nuisance violation, unless it is extreme.
Once the notice of default has been recorded, the focus turns to the inspection, registration, and maintenance duties under abandoned property ordinances. Code enforcement personnel will analyze whether a lender timely and properly inspects, registers, and maintains property according to the applicable abandoned property ordinance.261 Lenders, on the other hand, must take into account the loan provisions, general legal requirements, and the CVAPO as they consider foreclosure. A conflict arises for lenders because the steps taken to satisfy abandoned property ordinances may lead to acts that interfere with the owner–borrowers’ property rights or expose borrowers to extraordinary fees and costs that lenders later seek to recover through their credit bids at foreclosure sales. A borrower could claim that the lender’s entry onto the subject property is without consent and is a trespass that interferes with his quiet use and enjoyment.262 A borrower could also claim that the lender’s maintenance and security expenditures are unreasonable and thus are not recoverable through the foreclosure bid.263 To discuss how this could come about requires a brief walk through the foreclosure statutory scheme.
B. California’s Nonjudicial Foreclosure Statutory Scheme
A lender that encounters its borrower’s monetary default will typically demand that the borrower cure the arrearages (plus accrued fees and costs lawfully authorized) but then pursue foreclosure if the loan is not brought current. It is reasonable to assume that in most financial defaults the borrowers continue to occupy the residence.264 To a certain extent, this yields a 260 The typical trustee deed provision states: “[Section] 11.... Borrower shall be in default if any action or proceeding, whether civil or criminal, is begun that, in Lender’s judgment, could result in forfeiture of the Property or other material impairment of Lender’s interest in the Property or rights under this Security Instrument.” California-Single Family-Fannie Mae/Freddie Mae Uniform Instrument, Form 3005 01/01, § 11.
261 See supra Part III.C.
262 Richard E. Gottlieb, Margaret J. Rhiew & Brett J. Natarelli, Reckless Abandon: Vacant Property Ordinances Create Legal Uncertainties, 68 BUS. LAW. 669, 672 (2013).
263 See infra Part IV.B.4.
264 Occupancy is a greater likelihood now that it is fairly common knowledge that government programs and regulations have provided relief for many borrowers. For many, it is a modern “no-fault” default with a “bonus” whereby the borrower’s default is minimized (despite non-qualification or incorrect information, or both) and is given a loan modification (dependent on qualification), while lenders ironically receives government funds to underwrite the modification or a guarantee despite the “risky
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benefit to the lender in that it must inspect and register the property but need not maintain or keep it secure because the borrower–occupant presumably will perform those tasks. When abandoned, costs of monthly inspections, property managers, registration, and maintenance of the property, in addition to foreclosure costs,265 become significant given the length of time lenders need to analyze layers of federal and state regulation266 and then to determine whether a loan modification is feasible in light of the borrowers’ personal circumstances. Such costs will inevitably increase due to the length of time for the foreclosure process.267 The CVAPO’s requirements begin after lenders have recorded a notice of default.268 Before lenders concern themselves with the CVAPO requirements, lenders must carefully chart their course through the complexities of California foreclosure law. Also, it is incumbent on lenders to determine whether compliance with the CVAPO exposes them to potential liability for a borrower’s claim and whether the expenses to comply with the CVAPO are recoverable in the foreclosure process.
1. Basic Foreclosure Law in California
When a borrower fails to make monthly payments,269 a lender is required to pursue its remedy only against the security in a judicial foreclosure270 suit under the “one form of action” rule.271 But where the deed of trust grants a power of sale, a lender can pursue a nonjudicial foreclosure.272 A lender may commence both judicial and nonjudicial foreclosures, but an financing arrangements” some lenders offered. Thus, the irresponsible borrower’s default enables him to externalize his costs onto taxpayers, who fund the government programs, and the next generation of borrowers in Chula Vista, who will pay higher loan costs. Even if the borrower vacates, it is usually after a period of time in the property during which the borrower makes no loan payments and probably saves the money for rent or purchase of the next residence.
265 It is estimated that on average a lender expends $40,000 in fees and costs to complete a foreclosure. SOWELL, supra note 1, at 59.
266 See supra text accompanying note 66.
267 For example, a court may stay a foreclosure until it is determined whether the lender complied with the “assess and explore” duty under CAL. CIV. CODE § 2923.5 (2013). See Mabry v. Superior Court, 185 Cal. App. 4th 208, 214 (2010).
268 CHULA VISTA, CAL., MUN. CODE § 15.60.040 (2013).
269 Such a default may occur whether the loan requires payments of interest only, payments of principal and interest, or payments of principal, interest, taxes, and insurance.
270 A judicial foreclosure is authorized under CAL. CODE CIV. P. § 725(a) (West 2013).
271 CAL. CODE CIV. P. § 726; see also Krone v. Goff, 53 Cal. App. 3d 191, 193 (1975). Actually, the rule involves two rules: the one form of action rule and the security-first rule.
272 The power of sale is granted by the contractual covenants in the lender-borrower agreement,