New California Law Threatens To Stall All Second Lien Foreclosures

On June 30, 2025, California Gov. Gavin Newsom signed a large “budget trailer” bill that will have significant consequences on the mortgage industry. In relevant part, the new law addresses foreclosures on so-called zombie second mortgages. And while some regulation in this space may be warranted to ensure best practices, California’s new rule may completely stall legitimate foreclosures.

Critical Definitions

The new law creates Section 2924.13 of the California Civil Code. The law defines “subordinate mortgage” as any security instrument such as a deed of trust or a mortgage on residential real property that was subordinate to another security interest on the property when the lien was recorded. Section 2924.13 adopts the definition of “borrower” from Cal. Civ. Code Ann. § 2929.5(e)(1), which essentially covers any trustor under a deed of trust or a mortgagor under a mortgage, including any successor-in-interest.

The real issue lies with the law’s definition of “mortgage servicer,” which “includes the current mortgage servicer and any prior mortgage servicers.” Therefore, the law’s requirements on current servicers include each and every one of their predecessors who serviced the loan, even if a predecessor company is no longer in business.

Life of Loan Unlawful Practices

Section 2924.13 makes the following inactions an unlawful practice regarding a subordinate mortgage:

• Failing to communicate in writing with the borrower about the loan for at least three years (presumably at any point in the life of the loan);
• Failing to provide a notice of servicing transfer;
• Failing to provide a notice of loan ownership transfer;
• Foreclosing or threatening to foreclose after advising the borrower that the loan was written off or discharged, including by sending an IRS Form 1099;
• Foreclosing or threatening to foreclose after the statute of limitation expires;
• Failing to provide a periodic account statement when required to do so by law;

And while the law is generally directed at nonjudicial foreclosures, Section 2924.13 also provides that any of the above unlawful practices are permitted affirmative defenses in any judicial foreclosure on a subordinate mortgage in California.

Compliance Certification & Notice Before Sale

Section 2924.13 also imposes several obligations on a servicer before it can conduct a nonjudicial foreclosure. First, the servicer or its trustee must, when recording the notice of default, also record a certification under penalty of perjury (the certification) that the servicer (and all prior servicers) did not engage in any of the unlawful practices described above. Further, the servicer must list all instances when it (and all prior servicers) did commit any of the unlawful practices described above.

At the time that the notice of default is recorded, the servicer must also send two documents to the borrower via certified mail with return receipt requested to the borrower’s last known address. First, a copy of the certification must be provided. Second, the servicer must provide a notice to the borrower that advises that, if the borrower believes the servicer (or any prior servicer) engaged in any unlawful practice or that borrower believes the servicer misrepresented the compliance history of the entire loan, the borrower may petition a California court for relief before the foreclosure sale.

Borrower Remedies Before Sale

If the borrower elects to petition a court for relief before the foreclosure sale occurs, the sale will be enjoined until a final determination is made. Section 2924.13 also empowers the court to use any equitable remedies it finds appropriate, including “striking all or a portion of the arrears claim, barring foreclosure, or permitting foreclosure subject to future compliance and corrected arrearage claim.” As noted above, if the lender has initiated a judicial foreclosure, the borrower may identify the unlawful practices from Section 2924.13 as an affirmative defense.

Borrower Remedies After Sale

The law also provides remedies to the borrower after the foreclosure sale has been conducted. Specifically, a borrower may file suit to have the nonjudicial foreclosure sale set aside if (1) the certification was not recorded at all, (2) the certification indicates an unlawful practice occurred during the life of the loan, or (3) the borrower believes there was a misrepresentation of the compliance history in the certification. The law does protect bona fide third-party purchasers at a nonjudicial foreclosure sale by saying that any failure to comply with Section 2924.13 does not affect the validity of those sales.

Next Steps

The law and its many new requirements went into effect immediately. We recommend that servicers considering a second lien foreclosure in California review their files for evidence of all monthly statements, notices of servicing transfer, notices of ownership transfer, and any indications that the loan was charged off or had a 1099 issued. Servicers must also ensure that there is no gap in written correspondence with the borrower that exceeds three years during the life of the loan. Any missing documentation should be requested from a prior servicer, assuming they are cooperative and/or still in business. These details should also be included in any due diligence conducted before purchasing a second lien from another entity in the future. Servicers may also consider whether judicial foreclosure is the better route for some files, depending on the value of the lien. And, unfortunately, servicers should prepare for a significant uptick in litigation over second lien foreclosures in the future.