Summary: New California law gives owners, tenants, non-profits, and local governments a chance to outbid investors who buy foreclosures. It also bans the “auction bundling” of foreclosed homes, and prevents foreclosure blight with big fines. How will CA SB 1079 impact real estate investors in 2021 and beyond? Find out by reading more.
If the pandemic produces another wave of foreclosures, investors will have to wait in line to buy California properties. Governor Gavin Newsom signed the CA SB 1079 legislation into law, which will give several other groups of people priority in the purchase of foreclosed homes, including previous owners. It also prevents “auction bundling” and imposes steep fines on those who let foreclosed homes turn into eyesores.
The legislation is called “Homes for Homeowners, Not Corporations.” It was proposed by Democratic state Senator Nancy Skinner of Berkeley ahead of what could be another surge in foreclosures because of the pandemic. It’s meant to prevent the conversion of single-family homes to rentals by corporate landlords. (1)
You may also like: Is California a Good Place to Invest in Real Estate?
SB 1079 New Foreclosure Auction Rules
The way SB 1079 works is that foreclosed homes would be auctioned off individually. Sellers wouldn’t be able to bundle the homes together, as they did ten years ago. They’d have to sell each one to a single buyer. And that could be anyone, so an investor could bid on several homes at one auction, but not a whole group of homes in one transaction.
The auction would trigger a 45-day period in which tenants, families, local governments, non-profits, and land trusts could bid on the same properties, and homes would go to the highest bidder. The rules apply to single-family homes and small multi-housing with up to four units. (2)
The 45-day window would give people who lost their homes time to get their finances together or get help from a family member, and possibly get their homes back. Tenants would also have a crack at buying their long-time rentals. And local governments, non-profits, and land banks could also do something to preserve owner-occupied housing. The legislation would also prevent blight by imposing fines as high as $2,000 a day for homes that are allowed to deteriorate.
Skinner says: “We can’t afford a repeat of the foreclosure crisis when corporations gobbled up tens of thousands of homes and significantly reduced homeownership among California residents.” She says: “SB 1079 will help prevent another housing takeover that transferred massive amounts of wealth from California families to big corporations like Blackstone.”
Great Housing Crisis Transfer of Wealth
Back then, private equity investors and hedge funds swooped in at a time when many people were scared to buy homes. Property values had taken a nosedive, and no one knew how low they would go. People were skittish. Traditional investors were cautious. Loans were also hard to come by. And the number of foreclosed homes grew, turning neighborhoods into ghost towns with neglected homes falling into disrepair. Whole communities became undesirable.
That’s when the government stepped in with a program that incentivized institutional investors to buy foreclosed homes. Homes backed by Fannie Mae and Freddie Mac were bundled and sold off by the hundreds to institutional investors. The Atlantic reports that between 2011 and 2017, corporate investors spent a total of $36 billion on more than 200,000 foreclosed homes. (3)
It was generally believed that institutional ownership would be temporary — that the corporate investors would rent them out while property values recovered, and then sell the homes back into the market. As you know, that didn’t happen, and the corporate landlord was born. (4)
The Next Wave of Foreclosures in 2021 Due To COVID-19
According to the Wall Street Journal, some of these same corporate landlords are preparing for what could be another buying spree. The news site says that real estate investors have a “mountain of money” they’re ready to invest. The nation’s largest landlord, Invitation Homes, is one of them, along with American Homes 4 Rent, the Blackstone Group, J.P. Morgan Asset Management and others. (5)
But it won’t be as easy this time around due to SB 1079. There hasn’t been a wave of foreclosures during the pandemic because of a foreclosure moratorium authorized by the CARES Act, and mortgage forbearance programs. But even when those expire, the price of a foreclosed home will be higher because home values have not dropped. Homeowners also have more equity in their homes so they probably won’t just walk away, as many did during the Great Recession. They will probably try to sell them, pay off the loan, and take some equity with them.
There are a lot of delinquent loans, however, and it’s likely that a good portion of them could foreclose. Black Knight says there are 2.98 million homes enrolled in forbearance programs. That’s about 5.6% of the 53 million currently active home loans. (6) The Mortgage Bankers Association has a slightly higher estimate It says that 5.9% of all home loans are forborne or about 3 million loans. (7) And then there are about 400,000 borrowers who are delinquent and could qualify for a forbearance program but haven’t requested it. (8) Although some forbearance plans expire this year, most are active until March of next year.
California SB 1079 goes into effect on January 1st 2021.
Is SB 1079 Good or Bad for Real Estate Investors?
If you’re a corporate real estate investor looking to gobble up thousands of California homes that go into foreclosure due to COVID-19, SB 1079 isn’t doing you any favors. However, if you’re a smaller real estate investor or a tenant looking to become an investor, this law may have some advantages. We’ll keep this article updated as we know more.