Assessing the Potential Impact of California’s SB 2 on the Loan Servicing Market

Assessing the Potential Impact of California’s SB 2 on the Loan Servicing Market

Senate Bill 2, The Building Jobs and Homes Act — sometimes known simply as “the Act” — will soon result in new, affordable low income housing for individuals throughout the state. Although this is great news for California residents and localities plagued by ever-escalating housing costs, it could spell disaster for servicers who will be tasked with performing due diligence on loan processes subject to multiple value and use restrictions imposed both by both those agencies securing the loans and by localities administering the housing.

Combining world-class service with state of the art technology, Peak Foreclosure Services offer specialized foreclosure services in Los Angeles for a variety of client including private investors, banks, and servicers.

The Outcome of SB 2

The Building Jobs and Homes Act went into effect on January 1, 2018. Its main purpose is to secure a permanent revenue stream for the construction of low income housing by mandating a $75 recording fee for every real estate document that is not explicitly exempted from such fees and placing the funds in trust.

In its first year, the Act exceeded its projected goal of raising $250 million from the mandated recording fee increases. The 2018-19 California fiscal budget includes $5 billion to address homelessness and low-income housing, $255 million of which comes from the Building Homes and Jobs Trust Fund. These funds are now available for localities to use in the construction of low income and mixed-use housing projects.

The Impact of the SB 2 on the Loan Service Market

The problem for mortgage loan servicers and lenders lies the regulatory climate surrounding “affordable” or “low income” housing. Such housing is sold through local housing agencies to qualifying individuals at below market prices; as such, the housing units are subject to a number of value or use restrictions that are binding on both lenders and borrowers over a long period of time. For instance, the property’s use might be restricted to primary residence only, and borrowers could face limitations when they go to refinance the loan or sell the property. In some cases, the locality itself may have a “right of first refusal” in the event that the borrower defaults on the loan or some other catastrophic event occurs.

These limitations impose a burden of due diligence on servicers, lenders, and foreclosure trustees who are forced to comply with these restrictions or face liability not only from the borrower but also from state localities.

Two areas in particular will require special attention in this new regulatory climate: refinance loans and loan defaults. Because there are specific limitations placed on the borrower’s ability to refinance a qualifying low-income housing loan, servicers will have to examine these documents carefully to make sure that, among other things, pre-approval from the locality does not need to be obtained before the loan can proceed. The same due diligence applies to situations where the borrower defaults on an affordable housing unit loan. Servicers must check for various restriction agreements and requests for notice of default, whether recorded by the municipality or the agency (or both) and review these restrictions at all stages of the foreclosure process to make sure the servicer does not violate any person or agency’s rights.

While expansion of the affordable and low-income housing markets is good news for the residents of California, it exposes the loan service industry to the potential for greater liability, on multiple fronts. The industry needs to brace itself for dealing with these regulatory complexities; as SB 2 establishes a permanent fund slated for low income housing, more paperwork and a smaller margin of error for lenders are inevitable.

Peak Foreclosure Services in Los Angeles

Designed to support and meet the needs of a diverse clientele, Peak Foreclosure Services, Inc. assists banks, private investors, servicers, and sub-servicers in navigating the complex, ever-changing regulatory environment that comes with the industry. Our detail-oriented specialists process non-judicial foreclosure services in Los Angeles, California and in select U.S. states, including Arizona, Idaho, Montana, Nevada, and North Carolina.

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