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Short Sale Dual Tracking Limited by California Bill

Written by on Tuesday, 21 August 2012 7:00 pm
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The California "Homeowner Bill of Rights" was signed into law by Governor Brown July 11, 2012. A little-noticed feature of the act is that it contains a provision that prohibits lenders, in certain circumstances, from engaging in the process of "dual tracking" when a borrower is attempting to accomplish a short sale.

Dual tracking refers to the circumstance when one department of a loan servicer may be processing a foreclosure prevention application (such as for a loan modification or a short sale) while another department of the same organization is proceeding ahead with the foreclosure process (anywhere from filing a notice of default to actually conducting the sale). Gatherings of real estate agents routinely overflow with horror stories of dual tracking incidents: foreclosure auctions taking place just days before a short sale is scheduled to close, etc. Hopefully, passage of the Homeowner Bill of Rights will result in fewer such stories.

As noted, the prohibitions against dual tracking are limited to a specific set of circumstances: (1) The short sale must have been approved in writing by all applicable parties (e.g. first lien holder, junior lien holder[s], and mortgage insurer); and (2) "proof of funds or financing has been provided to the servicer."

If those conditions are satisfied, then (a) if the servicer has not yet filed a Notice of Default (NOD), it must not do so, or (b) if the NOD has already been filed, the servicer "shall not record a notice of sale or conduct a trustee's sale…" A "rescission [of the NOD] or cancellation of the pending trustee's sale shall occur when the short sale has been approved by all parties and proof of funds or financing has been provided to the mortgagee, beneficiary, or authorized agent."

Undoubtedly, there may be some disputes as to whether or not, or when, "proof of funds or financing has been provided". But, hey, that's what courts are for.

The above provisions are contained in section 2924.11 which will be added to the California Civil Code. Also, the legislation adds Section 2924.15 to the Civil Code. This provides that these regulations "shall apply only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. For these purposes, 'owner-occupied' means that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes."

The legislation takes effect January 1, 2013.

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