The Impact of AB 130 on Second Trust Deeds in California: A Real Estate Industry Analysis -VERY IMPORTANT

These are such crazy times politically, and I try to stay out of politics, but we just had a bill pass here in California that will affect everyone in Real Estate, including buyers and sellers. This article is one of those that you must read so you can sound knowledgeable when your clients ask you about second mortgages, home equity lines of credit, a seller carryback, an 80/10/10, or even a Bridge Loan or Flex Bridge loan.

Introduction

California Assembly Bill 130 (AB 130), signed into law in 2025, introduces significant changes to the real estate lending landscape by imposing stringent regulations on subordinate mortgages, particularly second trust deeds. These regulations, embedded in California Civil Code Section 2924.13, aim to protect borrowers but have sparked concerns within the real estate and lending industries about their impact on property rights, lending practices, and the broader housing market. This article explores the implications of AB 130 on second trust deeds, the potential industry response, legal challenges, and the constitutional concerns raised by stakeholders.

Key Provisions of AB 130

AB 130, originally part of a budget trailer bill, incorporates language from the previously defeated Senate Bill 681, opposed by the real estate industry. The new law applies to all subordinate mortgages on residential real property, regardless of whether the property is owner-occupied or income-producing. The key provisions are as follows:

Definition of Subordinate Mortgage

A subordinate mortgage is defined as any security instrument, including a deed of trust, that is recorded as subordinate to another security interest on the same residential real property. This includes purchase money loans, seller carryback loans, equity seconds, and home equity lines of credit (HELOCs).

Unlawful Practices

Section 2924.13(b) outlines practices deemed unlawful by mortgage servicers, including:

1. Failing to provide written communication regarding the loan for at least three years.
2. Failing to provide required transfer of loan servicing or ownership notices under federal laws like the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA).
3. Conducting or threatening foreclosure after indicating the debt was written off (e.g., via IRS Form 1099).
4. Foreclosing after the statute of limitations has expired.
5. Failing to provide required periodic account statements.

Foreclosure Requirements

Before initiating a nonjudicial foreclosure, mortgage servicers must:

1. Record a certification under penalty of perjury with the notice of default, stating either that no unlawful practices occurred or listing any violations.
2. Send the borrower, via certified mail, a notice informing them of their right to petition the court for relief if they believe the servicer engaged in unlawful practices, along with a copy of the certification.

The above is the problem, because servicers will not want to do this under penalty of perjury!

Borrower Remedies

• Borrowers can petition the court to enjoin a foreclosure sale until a final determination is made.
• In judicial foreclosure proceedings, unlawful practices by the servicer constitute an affirmative defense.
• Courts may provide equitable remedies, such as striking arrears, barring foreclosure, or allowing foreclosure with corrected claims.
• Borrowers can also petition to set aside a nonjudicial foreclosure sale if the required certification was not recorded or if it indicates unlawful practices.

Scope

The law applies to all residential properties, regardless of loan size or number of units, affecting institutional lenders, Wall Street securitizers, Fannie Mae, Freddie Mac, and private/hard money lenders.

Industry Impact

AB 130 significantly restricts the ability to enforce subordinate liens, effectively discouraging lenders from offering second trust deeds. The key impacts include:

1. Increased Risk for Lenders

The requirement for mortgage servicers to certify, under penalty of perjury, that no unlawful practices occurred introduces significant legal and financial risks. A minor error in servicing, such as a missed notice, could lead to litigation, delays, or the foreclosure being enjoined. This risk may deter lenders from issuing second trust deeds, as the potential for costly legal battles outweighs the benefits.

2. Disruption of the Second Trust Deed Market

Second trust deeds, including HELOCs, are critical for homeowners seeking to access property equity without refinancing low-rate first mortgages (e.g., 2.75% loans from previous years). By making foreclosure on subordinate liens legally precarious, AB 130 may lead to:

• Institutional Lenders Exiting the Market: Banks and large lenders may cease offering second trust deeds due to compliance costs and risks.
• Private/Hard Money Lenders Hesitating: Private lenders, who often provide quick capital for business or investment purposes, may find the regulatory burden too onerous.
• Impact on Wall Street Securitizers: The securitization of second trust deeds may decline, as the risk of unenforceable liens reduces their appeal to investors.

3. Consequences for Property Owners

Homeowners and investors relying on second trust deeds to access capital face significant challenges:

• Forced Refinancing: Without access to second trust deeds, homeowners with low-rate first mortgages may be forced to refinance at higher rates to access equity, increasing their financial burden.
• Reduced Investment Opportunities: Investors using second trust deeds for construction completion or property improvements may struggle to secure financing, which can stall projects and reduce the housing supply. Or even worse, leave a property 80% complete, which can bring down the neighborhood and property values.
• Economic Ripple Effects: Realtors, mortgage brokers, loan servicers, and title companies may experience reduced business as the second-trust deed market contracts.

4. Increased Litigation

The law creates opportunities for defaulting borrowers to challenge foreclosures, potentially leading to a surge in lawsuits. Plaintiff attorneys may exploit minor servicing errors to delay or block foreclosures, benefiting defaulting borrowers but burdening servicers and private investors with legal costs.

Industry Response

The real estate and lending industries are likely to respond in several ways:

1. Legal Challenges

Many attorneys view AB 130 as potentially unconstitutional, citing violations of due process and property rights. The requirement for servicers to certify compliance under penalty of perjury, coupled with the ease of borrower challenges, is an undue burden on private property rights. Industry participants, including institutional lenders and private investors, may:

• Seek an Injunction: File lawsuits to enjoin enforcement of AB 130, arguing that it infringes on contractual rights and imposes excessive regulatory burdens.
• Challenge on Constitutional Grounds: Argue that the law violates the Contracts Clause (Article I, Section 10 of the U.S. Constitution) by impairing existing loan agreements or the Due Process Clause by creating vague and punitive requirements.

2. Market Adjustments

• Exit from Second Trust Deed Lending: Institutional lenders, Fannie Mae, Freddie Mac, and private lenders may reduce or eliminate second trust deed offerings to avoid compliance risks.
• Shift to Alternative Financing: Lenders may explore other financing options, such as unsecured loans or cash-out refinances, though these may be less attractive to borrowers.
• Increased Servicing Costs: Third-party loan servicers may raise fees or cancel contracts for second-lien loans, forcing mortgage brokers to handle servicing internally, as required by securities laws like the Howey Test.

3. Advocacy and Legislative Pushback

The real estate industry, which successfully opposed SB 681, may mobilize to amend or repeal AB 130. Trade groups like the California Mortgage Association and the American Association of Private Lenders could lobby for legislative changes to mitigate the law's impact.

Constitutional Concerns

Critics argue that AB 130 undermines private property rights and free enterprise by:

• Impairing Contractual Obligations: By retroactively imposing new requirements on existing loans, the law may violate the Contracts Clause, which prohibits states from passing laws that impair the obligation of contracts.
• Vague Standards: The broad definition of "unlawful practices" and the requirement for servicers to certify compliance create ambiguity, potentially violating due process by failing[method:1] exposing servicers to liability for minor errors.
• Disproportionate Burden: The law places a heavy burden on lenders and servicers, potentially discouraging lending and stifling economic activity in the housing market.

Broader Implications

AB 130's restrictions on second trust deeds exacerbate California's housing challenges. Combined with other laws like AB 2424 (enhanced foreclosure notice requirements) and SB 1079 (additional foreclosure protections), the regulatory burden on property owners and lenders is increasing. Rising insurance costs and compliance requirements further strain property owners, potentially leading to higher rents and reduced housing affordability.

Recommendations for Stakeholders

• Real Estate Agents: Inform clients about the reduced availability of second trust deeds and explore alternative financing options.
• Lenders and Servicers: Consult legal counsel to ensure compliance with AB 130 and assess the feasibility of continuing second trust deed lending.
• Property Owners: Consider cash-out refinances or other financing strategies, as second trust deeds may become scarce.
• Industry Advocates: Support legal challenges and lobbying efforts to amend or repeal AB 130.

Conclusion

AB 130 represents a significant challenge to California's real estate lending industry, particularly for second trust deeds. By imposing stringent requirements and increasing litigation risks, the law may deter lenders from offering subordinate liens, limiting homeowners' access to equity, and stifling investment. While the industry may pursue legal challenges or adapt through alternative financing, the law's immediate impact could disrupt the housing market and exacerbate California's housing crisis. Stakeholders must act swiftly to navigate this complex legal landscape and advocate for reforms to protect property rights and market stability.

The above is serious in its current form, and some lenders may continue to offer second mortgages, while others will choose to withdraw, thereby reducing competition and potentially increasing rates. The state should repeal this portion of the bill, but it could take 2-3 years to achieve this if we do not act promptly.

Below is a list of California State Assembly members and Senators representing Los Angeles County and surrounding areas (including parts of adjacent counties like Orange, San Bernardino, and Ventura where districts overlap), with their district office contact information. This information is sourced from the California State Legislature's official websites and related resources. Note that district boundaries can be complex, so use findyourrep.legislature.ca.gov to confirm your specific representative by address.

California State Assembly Members (Los Angeles County and Surrounding Areas)

Each Assembly member represents approximately 475,000 people and serves a two-year term. Below is the list of assembly members and their contact:

https://www.assembly.ca.gov/assemblymembers

California State Senators (Los Angeles County and Surrounding Areas)

Each Senator represents approximately 988,000 people and serves a four-year term. Below is a link to your state Senator:

https://www.senate.ca.gov/senators

Notes

• Contacting Representatives: When reaching out, address correspondence as "The Honorable [First Name Last Name]" (e.g., The Honorable Tina McKinnor). Use district office phone numbers or contact forms for local issues, such as AB 130. Capitol offices are better for legislative matters.
• Verify Your Representative: District boundaries can be intricate, especially in densely populated Los Angeles County. Use findyourrep.legislature.ca.gov to enter your address and confirm your exact Assembly member or Senator.
• Surrounding Areas: Representatives from adjacent counties (e.g., Diane Papan in San Mateo, Cottie Petrie-Norris in Orange) are included due to proximity and overlapping regional interests, but check if they cover your area.
• Advocacy Tips: When contacting these offices about AB 130, clearly state your concerns (e.g., impact on second trust deeds, lending risks, housing market effects), provide personal or professional examples, and request specific actions like amending the law or supporting legal challenges.

If you need contact information for additional districts or specific guidance on drafting outreach messages, let me know!

Letter to State Senator and Assemblymember Regarding AB 130

The website is requiring a letter with under 2000 characters-

Dear Assemblymember Schiavo,

I am a Santa Clarita resident and owner of a local mortgage company, writing to express concerns about California Assembly Bill 130 (AB 130), signed into law in 2025. Specifically, California Civil Code Section 2924.13 imposes restrictive rules on subordinate mortgages, like second trust deeds, threatening the stability of our local real estate market.

AB 130 requires mortgage servicers to certify under penalty of perjury that no unlawful practices occurred, creating significant legal and financial risks for lenders. This discourages offering second trust deeds, vital for homeowners accessing equity without refinancing low-rate first mortgages (e.g., 2.75% loans). For instance, a Santa Clarita homeowner needing $100,000 for improvements may face higher refinance rates, increasing financial strain. The law also limits investment in income-producing properties, hindering housing development.

The vague standards and ease of borrower challenges invite frivolous litigation, burdening lenders and investors with costly defenses. Many in the industry believe AB 130 may violate the Contracts Clause and due process by impairing loan agreements and imposing excessive burdens. While legal challenges may take years, the law is already disrupting lending and reducing market liquidity.

As your constituent, I urge you to:

1. Support amendments to clarify unlawful practices, exempt certain loans, or remove the perjury requirement.
2. Back industry efforts for an injunction against AB 130's enforcement pending constitutional review.
3. Hold hearings to gather input from realtors, brokers, lenders, and homeowners on the law's impact.

Santa Clarita's housing market relies on accessible financing. AB 130 limits options and discourages investment. Please confirm receipt and share your planned actions. I'm happy to provide further input or connect you with affected professionals.

Sincerely,

Mike Meena

Okay, that was a lot, and I apologize, but this is very important. Just yesterday, I spoke with a client who is taking out a 2nd on his house to make improvements and using some of the proceeds to put down on a home for his daughter and son-in-law. He owes $460,000 on the first at 2.875% and we are offering him $125,000 on a second on his house, worth $1,100,000. His rate on the second is 6.875% for a 20-year fixed-rate mortgage, and the monthly payment is $959.77. His current principal and interest payment is $2095 with 26 years remaining. If all the second mortgage lenders pull out, he would have to refinance, and his payment would be $3,794, with a full 30 years remaining.

There is more on this coming out every minute, but this is UGLY! We will see how it shakes out and I appreciate your help!

I know only a portion of you will send a letter out or make a call, but taking the time now could help all of us in the future.

Have a Happy and safe 4th of July and let me know if you need anything!