Foreclosure Moratorium – What it Means for Borrowers and Lenders in California

On March 16, 2020, in response to the COVID-19 pandemic, California Governor Gavin Newsom signed Executive Order N-28-20, which suspends certain state laws restricting local government’s exercise of its police power and suspends judicial foreclosures through May 31, 2020. Following the Governor’s direction,on April 16, 2020, the Judicial Council of California approved an emergency rule suspending all actions for judicial foreclosure on a mortgage or deed of trust,including any action for a deficiency judgment, until 90 days after the Governor declares that the state of emergency related to the COVID-19 pandemic is lifted.

While touted as a“moratorium” on foreclosures, the Governor’s Order and Judicial Council emergency rule only suspend judicial foreclosures, which are very uncommon in California and rarely used by lenders as a result of the widespread use of power of sale clauses in mortgage notes and deeds of trust. The much more common process used by lenders in California is non-judicial foreclosure whereby the lender initiates the foreclosure and causes the sale of the property without initiating court proceedings. The foreclosure moratorium, as currently set forth, does not suspend this non-judicial process.

As part of Executive Order N-28-20, Governor Newsom also requested that financial institutions holding residential and commercial mortgages voluntarily implement an immediate moratorium on non-judicial foreclosures. In response, on March 25, 2020,Governor Newsom announced that some of the nation’s largest banks, including Citigroup, JP Morgan Chase, Wells Fargo, and U.S. Bank, as well as nearly 200 state-chartered banks, credit unions, and lenders would  voluntarily institute a 90-day grace period for all mortgage payments, as well as provide relief from non-judicial foreclosure sales. As part of this voluntary program, these banks and lenders have agreed to offer mortgage-payment forbearances of up to 90 days for those impacted by COVID-19. They will also allow borrowers to reduce or delay their monthly mortgage payments, waive or refund mortgage-related late fees and other fees, not report late or missed payments to credit agencies, and not start any new foreclosures for a period of 60 days.

In addition, for homeowners impacted by COVID-19, there are federal protections that may apply.The CARES Act provides foreclosure relief for “federally-backed loans”purchased, securitized, owned, insured, or guaranteed by Fannie Mae or Freddie Mac, or owned, insured, or guaranteed by the FHA, the VA, or the USDA. Unlike California’s foreclosure protections, the federal CARES Act applies to both judicial and non-judicial foreclosure processes. However, approximately one-third of residential mortgages are not federally backed and thus not covered by the CARES Act.

For lenders and borrowers who are not subject to the CARES Act or California’s voluntary program, there remains uncertainty. For the time being, it appears that these lenders can declare defaults even if such default was due to the impact of COVID-19, and they may proceed with initiating non-judicial foreclosures. What remains to be determined is the fate of these foreclosures. Will the California government step in to close this loophole and institute further foreclosure restrictions to protect all borrowers and provide clarity for lenders? Will the courts reopen to allow borrowers to petition for temporary restraining orders halting non-judicial foreclosures where the borrower feels they are being foreclosed on unlawfully? These questions remain to be answered in the days,weeks, and months to come as more and more borrowers and lenders feel the financial effects of COVID-19.  

Our firm handles all aspects of real estate law and is closely monitoring state and federal legislation and its impact on our clients. If you have questions on how COVID-19 impacts you and your real estate rights and remedies, please contact us.