California REALTORS Push Legislation To Extend Anti-Deficiency Protection for Homeowners

Dennis Norman

California typically marches to the beat of it’s own drum, as I discovered last year when I did a post on the Mortgage Forgiveness Act only to find out that the State of California was not following suit, as most states were, and forgiving homeowners of their state income taxes on forgiven debt. Well, a few months, and about 180 comments later in the thread, I saw that California ultimately came around and passed legislation forgiving borrowers of state income tax on forgiven debt.

Now, we have a new California issue. In this case, California has, in contrast to the issue above, laws that are much more generous to homeowners than most of the country. Specifically what I’m referring to is California’s Civil Code of Procedure, Sections 580a through 580d, which basically says that a lender cannot sue a borrower, thereby resulting in a judgment, for defaulting on a mortgage provided the mortgage was used to purchase a 1 to 4 family residence that the borrower lived in. So you can lose your house, but even if the lender takes a bit hit on it, under California law you don’t have to worry about being sued for the deficiency. Sweet! While other states have some “anti-deficiency” laws, not many are as protective of a borrower as California’s.

There is a “flaw” though..

Apparently the California anti-deficiency law only applies to “purchase mortgages” so homeowners that refinanced (as so many did over the past decade) may have given up their protection under this law by refinancing. This raises several questions, one of which is, did the lenders doing the refinancing make the borrower aware that this was the case, or did they just let the borrower proceed blindly into the refi not realizing that the anti-deficiency protection they were giving up may be worth more to them than the lower rate they were getting?

The California Association of REALTORS to the rescue..

The California Association of REALTORS (C.A.R.) is calling on California state senators to vote “yes” and approve SB 1178 which will extend anti-deficiency protection for consumers who have refinanced their original mortgage loans and now are facing foreclosure. C.A.R. is the sponsor of the legislation.

“Most homeowners don’t know that when they refinanced their original loan they lost critical legal protections and now may be personally liable for the difference between the value of their foreclosed property and the amount they owe the lender,” said C.A.R. President Steve Goddard. “If a foreclosed home’s market value is $250,000 and the balance on the refinanced loan is $350,000, the homeowner is personally liable for the $100,000 difference under existing law.”

“If lenders are allowed to look beyond the property actually being taken as security, and make the decision to lend based upon the borrower’s other assets, it erodes their incentive to make certain that the loan “pencils out” and has adequate security,” he said. “If a lender only can look to the value of the home being financed, the underwriter will be more careful about the value of the asset. The same reasoning should apply to refinanced loans. Without SB 1178′s protections in place, if the borrower has any other assets, the lender can go after the borrower and demand a deficiency.

“Cash out refinances deserve more limited protections,” Goddard said. “C.A.R.’s bill will extend these critical protections only to loans that refinance the existing debt as well as additional debt used to improve the property — not for loan amounts used for other consumer expenses.”
C.A.R. has rejected proposed amendments to the bill by the lending industry that would restrict the legislation from applying to loans originated prior to 2011.

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