Originally, the Governor vetoed the first anti-deficiency judgement law, SB 1178, which had been passed by both the Senate and Assembly of California. But rather than arm-wrestle, they submitted SB 931, both houses passed it, and the governor signed it on October 1st.
From the California Association of Realtors:
SB 931 (Ducheny) Short sales and anti-deficiency
Existing law allows a mortgage lender to demand the right to a “deficiency” judgment for the balance due on a note as part of the lender’s negotiations in connection with a short sale. SB 931 requires the first lien holder to accept the agreed upon short sale payment as full payment for the outstanding balance of the loan. The bill does not apply this deficiency protection to junior notes secured by the real property. Lenders do not oppose SB 931 as it would ONLY prohibit a deficiency on a first mortgage note secured by real property when the property is sold in a short sale.
C.A.R. supports SB 931 as it does provide deficiency protections for homeowners; however, because this bill does not apply these protections to junior notes, or to foreclosures, C.A.R. believes that it does not go far enough.
SB 931 applies to short sales only, and those that close after January 1, 2011, where SB 1178 had also included the first mortgages that were foreclosed. There is no homeowner protection from the second-mortgage holders obtaining a deficiency judgement in SB 931. Owner-occupancy is not mentioned.
SB 931 also includes this anti-fraud verbiage:
The bill would specify that those provisions would not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any 3rd party for fraud or waste if the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures that deed of trust or mortgage.
Here is the official language: sb_931_bill_20100930_chaptered
Why the veto of previous version? I dunno.
Maybe the “Let’s push ’em all over to the short-sale line” lobby got in his ear?
SB 1178 and 931 were two seperate bills on different topics presented to the governor for signature at the same time. In vetoing SB 1178, the governor refered to the stability and sanctity of contract.
http://www.secondmortgagesdirect.com/blog/2010/06/banks-see-poor-second-mortgage-loan-performance/
The last paragraph is interesting “Historically, delinquencies on home equity loans have been very low, but all that changed last year.”
I think the politicians are trying to get a “win win” here while appeasing the banks. As junior note default rates rise the banks and the politicians are aligned to offer nothing for something.
huh? dis flu ova my hed…
Can someone translate this to Common?
OT: The Chargers will never win a Super Bowl with Norv Turner coaching.
Ok, I will see if I can translate.
After the depression, California passed a bunch of anti-deficiency laws that put the burden on the lender not to overvalue real estate. Prior to that time, borrowers were liable for deficiencies in almost all situations, and the California legislature acted to protect borrowers who were getting sued on foreclosed loans for huge sums when the lenders were foreclosing for pennies on the dollar during the depression.
One of those important anti-deficiency statues remaining to this day is CCP 580d. It basically says that once a lender uses and finishes the relatively quick and easy non-judicial foreclosure method, “power of sale” contained in the deed of trust, it waives the right to go after the borrower for a deficiency. The language of the statute states, in pertinent part:
“No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property … in any case in which the real property has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.”
Notice that the statute applies only when the foreclosure sale takes place. It does not matter if the loan is purchase money, refinance, or residential or commercial property as long as the sale takes place under power of sale contained in the deed of trust.
A short sale, however, is not a sale “under power of sale” contained in the deed of trust, and that has created situations where lenders could try, and have tried, to claim that they are entitled to a deficiency in short sale situations, when as a practical matter, borrowers would not be liable for any deficiency if they do not participate in the short sale and instead allow the property to go into foreclosure. This has been a professional liability trap for agents who don’t carefully review lender short sale approval letters.
(This analysis changes when there are second liens, and this stuff can get complicated.)
What SB 931 (now enacted as CCP 580e) does is sort of logically extend short sales on residential property so they are treated the same as foreclosure sales under CCP 580d. Beginning 1/1/11, short sales will no longer be legal landmines for borrowers on residential property (having only a first mortgage) who go along with a short sale instead of allowing a non-judicial sale to take place.
SB 1178, which was vetoed, was a proposed amendment to CCP Section 580b, which is a separate rule of anti-deficiency protection having to do only with owner occupied 1-4 unit purchase money loans.
Everyone is probably even more confused now.
OT –
I just saw the sad news that Tony Gwynn has cancer of the “salivary gland”. He thinks its related to his years of chewing tobacco (“dipping”).
Tony is one of my all time favorite professional athletes. I hope he beats it just like hitting a bouncer up the middle or through the hole for another late inning clutch hit.
Kingside: After the depression, California passed a bunch of anti-deficiency laws that put the burden on the lender not to overvalue real estate.
And this might have worked if the market hadn’t actually been for tranchable pieces of paper instead of houses.
When do we get a bill that requires lenders to hold 30% of every mortgage they issue? That would go a lot farther in not encouraging the lender to overvalue.
Wouldn’t a true anti-deficiency law simply mean making people pay their mortgages as promised? Apparently their idea of anti-deficiency actually means forgiving deficiency, not enforcing it.
From CAR:
We were disappointed that, at the eleventh hour, Gov. Schwarzenegger vetoed SB 1178 (Corbett), a C.A.R.-sponsored bill that would have extended anti-deficiency protections to consumers who have refinanced their original mortgage loans and now are facing foreclosure. While we were pleased that the governor signed SB 931 (Ducheny), a C.A.R.-supported bill protecting homeowners who get their lender’s approval for a short sale from deficiency judgments, that bill only protects against senior lenders and doesn’t have the broader effect of SB 1178. However, we’re not giving up just yet. The C.A.R. Board of Directors, last week in Anaheim, directed us to pursue this legislation again next year. I want to personally thank everyone who responded to the Red Alert and urged the governor to sign SB 1178.
could somebody please clarify 1 point for me? Does SB931 prevent a deficiency against a homeowner that does a short-sale BUT has re-financed their mortgage (They only have 1 mortgage (no 2nds)) but it was refinanced.
also As far as foreclosure for people who have refinanced and only have 1 mortgage – if banks want to go after a deficiency judgement they have to do judicial foreclosure – if they do a deed of trust/power of sale – sale There is no recourse for a deficiency judgement.