Hat tip to shadash for bringing this up, and to Kingside for the clarification – from CAR:
New Anti-Deficiency Protection for Refinance Loans Made After January 1, 2013
Starting January 1, 2013, a new California law will protect homeowners who default on their refinance loans from personal liability for any deficiency following foreclosure.
Existing anti-deficiency law protects a borrower from personal liability for the difference between the principal balance and what the lender receives at foreclosure if the loan is a purchase money loan secured by an owner-occupied property with one-to-four residential units.
The new law, Senate Bill 1069, extends that anti-deficiency protection to include any loan used to refinance the purchase money loan, plus any loan fees, costs, and related expenses for the refinance. The anti-deficiency protection, however, does not extend to any “cash out” in a refinance, which is when the lender advances new principal not applied to any obligation owed under the purchase money loan.
This new law only applies to refinance loans or other credit transactions used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, that are executed on or after January 1, 2013.
For purposes of this law, any payment of principal shall be deemed to be applied first to the principal balance of the purchase money loan, and then to the principal balance of any new advance and interest payments shall be applied to any interest due and owing.
C.A.R. supported Senate Bill 1069 in the legislative process as many homeowners do not realize that, by refinancing, they lose their anti-deficiency protection for a purchase money loan. Senate Bill 1069 is similar to Senate Bill 1178 sponsored by C.A.R. in 2010, but vetoed by Governor Schwarzenegger.
I think banks will be a little nervous about loaning due to this. Will all these laws prevent prices from rising because banks are more skittish?
It seems to only apply to refinancing. It may become harder to refinance to a lower rate.
The anti-deficiency law already applies to purchase loans, and it hasn’t stopped lenders from offering all-time low rates so far.
I think the key part is the refinance of existing balance only – once you pull cash out, you are liable again for the deficiency if foreclosed.
Should you wait to refi until this new law goes into effect on Jan 1? Because if you refinance now, you lose the anti-deficiency protection on your purchase-money mortgage.
Are refi deficeincy judgments even pursued? The few people I know who cashed out and walked we’re never bothered.
Good point, but that’s not bothered…yet.
The paper might be sitting in a box in the basement waiting to be shipped to the collectors.
is there a statute of limitations on collecting on deficiency? I know time periods to sue people for damages can be quite short in ca, like 3 years in a lot of cases. There are different time periods for certain things.
There probably is a limit on collections, but if it’s for the banking industry then they can probably get an extension – it’s an election year! 😆
Speaking of banks, we have seen BofA have several knee-jerk reactions over the last couple of years which makes us think that they are in full panic mode trying to right the ship.
This week BofA reduced commissions on all REO listings from 6% to 5.25%, and then I get this email from a reader:
My loan agent told me something interesting on Jul 20 when I was sitting in her office at my local branch doing paperwork. She had just received an email from BofA HQ that instructed her to only process loan applications for primary residence homeowners. The mandate instructed her to enforce the new rule through the month of August.
It’s probably nothing, like the rest of their machinations, but if BofA bankrupts the Countrywide unit this week or something else crazy, then you can say you heard about it here first!
Although this is nice, it doesn’t help the tax burden part, which is federal. If I understand correctly “walking away” when underwater historically incurs income tax on the balance we’re talking about here – the deficiency between owed and foreclosure sale. This tax has been waived temporarily but it is set to expire and no guarantees that it’ll magically re-appear. So just because BoA can’t go after you doesn’t mean you’re off the hook, especially with our dysfunctional congress.