BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



           ------------------------------------------------------------ 
          |SENATE RULES COMMITTEE            |                   SB 931|
          |Office of Senate Floor Analyses   |                         |
          |1020 N Street, Suite 524          |                         |
          |(916) 651-1520         Fax: (916) |                         |
          |327-4478                          |                         |
           ------------------------------------------------------------ 
           
                                         
                                 THIRD READING


          Bill No:  SB 931
          Author:   Ducheny (D)
          Amended:  3/25/10
          Vote:     21

           
           SENATE BANKING, FINANCE, AND INS. COMMITTEE  :  11-0, 4/7/10
          AYES:  Calderon, Cogdill, Correa, Cox, Florez, Kehoe, Liu,  
            Lowenthal, Padilla, Price, Runner
          NO VOTE RECORDED:  Vacancy

           SENATE JUDICIARY COMMITTEE  :  4-0, 5/4/10
          AYES:  Corbett, Harman, Hancock, Leno
          NO VOTE RECORDED:  Walters


           SUBJECT  :    Mortgages:  deficiency judgments

           SOURCE  :     Author


           DIGEST  :    This bill requires the holder of a first  
          mortgage or deed of trust that is secured by residential  
          real property to accept, as full payment, the proceeds of a  
          short sale to which it agrees in writing, and obligates  
          that note holder to fully discharge the remaining amount of  
          the borrower's indebtedness on the deed of trust or  
          mortgage following the sale.

           ANALYSIS  :    

          Existing law:

                                                           CONTINUED





                                                                SB 931
                                                                Page  
          2

          1. Prohibits a lender from using pursuing a borrower for a  
             deficiency judgment on a purchase money mortgage or deed  
             of trust that is secured by single-family residential  
             real property (Code of Civil Procedure 580b).  

             Note:  There is some disagreement among legal  
             professionals about the circumstances under which the  
             purchase money protection provided by CCP 580b applies.   
             However, it is generally believed to provide protection  
             to a purchase money note that becomes the subject of a  
             judicial or nonjudicial foreclosure action or a short  
             sale.

          2. Prohibits a lender from pursuing a borrower for a  
             deficiency judgment on a note on which that lender  
             exercised its power of sale through the nonjudicial  
             foreclosure process (Code of Civil Procedure 580d).

             Note:  There is some disagreement among legal  
             professionals about whether this statute additionally  
             applies to notes that become the subject of a judicial  
             foreclosure.

          3. Defines a deficiency judgment as a personal judgment  
             against a debtor for a recovery of secured debt,  
             measured by the difference between the debt and the net  
             proceeds received from a foreclosure sale (case law).

          4. Defines waste, in the context in which it is used in  
             this bill, as any unlawful act or omission, by the  
             tenant or other person in possession of land, that  
             causes a permanent injury to the inheritance, by  
             injuriously affecting the market value of the property.   
             There must be a permanent diminishment or depreciation  
             in the value of the property for waste to have occurred  
             (case law).

          5. Prohibits any person whose interest is subject to the  
             lien of a mortgage from performing any act that will  
             substantially impair the mortgagee's security.

          This bill:

          1. Provides that no judgment shall be rendered for any  

                                                           CONTINUED





                                                                SB 931
                                                                Page  
          3

             deficiency under a note secured by a first deed of trust  
             or first mortgage for a dwelling of not more than four  
             units, in any case in which the trustor or mortgagor  
             (i.e., the borrower) sells the dwelling for less than  
             the remaining amount of the indebtedness due at the time  
             of sale, with the written consent of the holder of the  
             first deed of trust or first mortgage.

          2. Provides that written consent of the holder of the first  
             deed of trust or first mortgage to that short sale  
             obligates that holder to accept the sale proceeds as  
             full payment, and to fully discharge the remaining  
             amount of the indebtedness on the first mortgage or deed  
             of trust.

          3. Provides this bill does not limit the ability of the  
             holder of a first deed of trust or first mortgage to  
             seek damages or use existing rights and remedies against  
             the trustor or mortgagor or a third party, if the  
             trustor or mortgagor commits fraud, with respect to the  
             sale of, or waste, with respect to, the real property  
             that secures the first deed of trust or first mortgage.

           Background

           A short sale is a real estate transaction in which a lender  
          allows a borrower to sell his or her home for less than the  
          full amount the borrower owes on their mortgage.  For  
          example:  John owes his mortgage lender $275,000.  John's  
          mortgage lender agrees to let John sell his house for  
          $225,000, with the understanding that the lender receives  
          all of the proceeds from the house sale.  John avoids  
          foreclosure.  John's lender loses out on $50,000 in  
          principal to which it was entitled under the provisions of  
          John's mortgage, but the lender avoids the costs of  
          foreclosure, and has one less bank-owned property on its  
          hands.

          Short sales have begun to increase in popularity among both  
          lenders and borrowers, since California's mortgage troubles  
          first became apparent in early 2007.  According to the  
          California Association of Realtors, there were  
          approximately 90,000 short sales in California during 2009,  
          up from only a few thousand in 2008, and a negligible  

                                                           CONTINUED





                                                                SB 931
                                                                Page  
          4

          amount in 2007.

          Some of the advantages of short sales are summarized above.  
           One of the other key advantages:  negative equity is wiped  
          out.  The new property owner is not saddled with a mortgage  
          worth far more than the house; if the new owner even holds  
          a mortgage (some short sales are paid fully in cash), the  
          size of that mortgage is in line with the fair market value  
          of the property.

          However, as short sales have become more popular, lenders  
          have become more creative in what they require from  
          borrowers, as a condition of agreeing to the short sale.   
          Several lenders are now requiring borrowers to agree that  
          the lender may pursue them for the difference between the  
          sales price of their home and their unpaid mortgage balance  
          (to agree, in other words, to a sort of hybrid short sale,  
          where the lender temporarily agrees to accept less than the  
          amount they are owed on the mortgage, but reserves the  
          right to pursue that borrower for the full amount at some  
          point in the future).

          California Code of Civil Procedure Section 580b and case  
          law provide that original, purchase money loans are  
          non-recourse.  A non-recourse loan is one on which the  
          borrower is not personally liable.  If the borrower  
          defaults on a non-recourse loan, the lender can seize the  
          collateral securing the note, but the lender's recovery is  
          limited to the collateral.  If the value of the collateral  
          is insufficient to cover the outstanding loan balance, the  
          difference between the value of the collateral and the  
          unpaid principal balance of the loan becomes a loss for the  
          lender.

          Some borrowers (particularly those who purchased homes  
          during the boom years of the early to mid 2000s) took out  
          both a first mortgage and a second mortgage when they  
          purchased their homes.  If both loans were taken out at the  
          time of purchase, both are purchase money loans, and both  
          are considered non-recourse.

          Refinanced loans are typically recourse in nature (the one  
          exception is a scenario in which the borrower refinances a  
          purchase money loan with the same lender and takes out no  

                                                           CONTINUED





                                                                SB 931
                                                                Page  
          5

          additional money, other than money to pay closing costs).   
          Thus, in most cases, if a borrower refinances one or more  
          of their purchase money loans, the refinanced mortgage(s)  
          are considered recourse loans.  Recourse loans give the  
          lender the right to pursue a debtor's personal assets, to  
          collect the unpaid principal balance of the loan.

          California also has what is known as the "one form of  
          action rule," which is found in Section 726(a) of the Code  
          of Civil Procedure.  The one form of action rule is complex  
          and embodies a variety of related, but distinct rules and  
          principals, all of which have been litigated.  However, for  
          purposes of explaining the impact of this bill, the one  
          form of action rule may generally (and simply) be described  
          as follows.  Under the one form of action rule, a lender  
          may take only one action to collect on a mortgage or deed  
          of trust.  Thus, if a lender chooses to foreclose, that  
          lender may not pursue the borrower in court to collect the  
          difference between the foreclosure price and the loan  
          amount; the lender's "one form of action" was foreclosure.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No    
          Local:  No

           ARGUMENTS IN SUPPORT  :    According to the Housing  
          Opportunities Collaborative, many real estate licensees who  
          assist homeowners with short sales are not fully aware of  
          how the various scenarios work, and some short sellers are  
          likely to be surprised in years to come, when collection  
          agencies and attorneys attempt to collect or obtain  
          judgments corresponding to the personal liability the short  
          sellers incurred.  The Housing Opportunities Collaborative  
          asserts that short sales prevent the vacancies that often  
          follow foreclosures, keep the real estate market moving,  
          and save banks millions in foreclosure costs and costs  
          associated with REO properties.  They also observe that on  
          several occasions, homeowners with non-purchase money loans  
          have been surprised and torn by the financial outcomes that  
          can result from a short sale.  After learning of these  
          outcomes, "many decide that a short sale just isn't the  
          smart decision."


          JJA:do  5/6/10   Senate Floor Analyses 

                                                           CONTINUED





                                                                SB 931
                                                                Page  
          6


                       SUPPORT/OPPOSITION:  NONE RECEIVED

                                ****  END  ****









































                                                           CONTINUED