California Legislation Takes Aim at “Dual Tracking”

This has happened many more times than it should have.

The homeowners are behind in their payments and a notice of default has been filed.  The balance of the mortgage loan is greater than the value of the property.  It is “under water”.  Although the owners could just let the property slide into foreclosure, they prefer to put it on the market.  That alternative, they figure, would be better both for them and for the lender.  Their credit will be slightly less damaged; and the lender will recover more than if a foreclosure went through.

The home is marketed, a buyer is found, and the protracted, confusing, and often frustrating short sale approval process begins.  Meanwhile, in some other department of the lender’s organization, the default status of the loan is elevated to “notice of sale.”  An auction date has been set.

Finally, the short sale has been approved, an escrow is opened, and the buyer begins his diligence and new-loan processing in earnest.  All the while the auction date approaches.  And…you guessed it.  Just before escrow is due to close, that other department proceeds with the foreclosure sale.  A lot of hard work and good intentions have gone for naught.

The process that brought this about is known as dual tracking.  There are two processes proceeding on different tracks, with no discernible coordination between them.

Currently in California there is legislation pending that would put an end to dual tracking.  One of the proposals had its origins in the office of state Attorney General (AG) Kamala Harris.  It is part of a package of proposals – the “Homeowner’s Bill of Rights” – that grew out of the AG’s negotiated settlement with a group of major banks that had been accused of a variety of mortgage loan abuses and illegal misdeeds.  Her intent is to build upon the terms of that settlement and to enact many of its provisions into laws that will affect all mortgage lenders in California.

The Homeowner’s Bill of Rights proposals are spelled out in two bills – Assembly Bill 1602 (Eng) and Senate Bill 1470 (Leno).  The dual tracking portion of these bills provides that a lender could file neither a notice of default nor a notice of sale when a “timely-filed application for a loan modification or other loss mitigation measure is pending.”

Not surprisingly, a variety of banking and other business interests have opposed these bills.  With respect to the dual tracking prohibition, the opposition is essentially grounded in the concern that they create great potential for “gaming the system” and that, in many cases, they would simply “postpone the inevitable.”

The California Association of Realtors® has also sponsored legislation aimed at dual tracking.  The bill – Assembly Bill 1745 (Torres) – is much narrower in scope than the dual tracking proposals contained in AB 1602 and SB 1470.  For one thing, its provisions are not triggered by an application for loan modification.  It only applies to the short sale process, and it only comes into play when a short sale has been approved.  It would allow notices of default to be filed, so that the statutory ninety-day period could be running, but it would prohibit filing a notice of sale once a short sale had been approved.

AB 1745 should be more palatable to the lending community, but it would still prevent the most egregious results of dual tracking.  On the other hand, the bills backed by the Attorney General have a great deal of political clout.  Time will tell.