BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 931
                                                                  Page  1

          Date of Hearing:   June 21, 2010

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
                     SB 931 (Ducheny) - As Amended:  June 1, 2010

           SENATE VOTE  :   31-0
           
          SUBJECT  :   Mortgages: deficiency judgments

           SUMMARY  : Provides that in the case of a short sale on  
          residential real property, the holder of the first mortgage or  
          deed of trust shall fully discharge any remaining borrower's  
          indebtedness following the sale when the sale has been agreed to  
          in writing.  Additionally, that nothing shall limit the ability  
          of the holder of the first deed of trust or first mortgage to  
          seek damages, or use existing rights or remedies in those cases  
          where the homeowner has committed fraud or waste in connection  
          with the sale of the real property.   

           EXISTING LAW  

          1)Prohibits a lender from 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).









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          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, which 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.

           FISCAL EFFECT  :  None

           

          COMMENTS  :   

          According to the author:

            The purpose of this proposed legislation is primarily to  
            protect distressed homeowners who have non-purchase money  
            recourse loans on residential property (1-4 units), when the  
            fair market value of the subject property is less than the  
            balance of the first deed of trust.  The legislation will  
            make sure that these homeowners do not incur a higher dollar  
            amount of liability after a short sale than they would  
            otherwise have after a foreclosure sale.  For many  
            homeowners in the group described above, a short sale would  
            result in greater personal liability.

          Before proceeding further with the overview of this bill it is  
          necessary to provide some context to this subject by defining  
          some key concepts and terms.

          1)Short Sale: A transaction in which a lender allows the  
            property securing the loan to be sold for less than the  
            remaining mortgage amount due and accepts the proceeds as full  
            payment of the loan.

          2)Purchase Money:  If the loan securing the property was  
            obtained to purchase the residential property in which all or  
            part of the property is owner occupied, the loan is considered  
            a "purchase money loan."









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          3)Non-recourse loan:  A loan in which the borrower is not liable  
            for any outstanding balance if the borrower defaults.   
            Typically, purchase money loans are non-recourse.

          4)Recourse loan:  A loan in which the borrower is liable for any  
            outstanding balance leftover if the borrower defaults.   
            Refinance loans are typically recourse loans, except in the  
            case of where the borrower refinances the purchase money loan  
            with the same lender and takes out no additional money.

          5)"One form of action rule":  Simply stated, this rule provides,  
            under Section 726(a) of the Code of Civil Procedure that a  
            creditor may only choose one action to collect on a mortgage  
            or deed of trust.  For example, if the lender forecloses, they  
            may not pursue the borrower in court for the difference  
            between the foreclosure price and the loan amount.  

           Background.
           
           Foreclosures continue to be an on-going problem in California  
          and across the nation.  In April of 2010, almost 28,000 notices  
          of default were filed in California.  While this is a decrease  
          of 16% over the previous month, homeowners continue to face  
          difficulties in a weak economy.  In many cases a short sale is  
          an option that is better for both the borrower and lender, as  
          foreclosure is rarely a win-win situation for anyone.  While  
          federal efforts continue to attempt to mitigate foreclosures  
          through loan modifications, it is accepted logic that not every  
          borrower in trouble would benefit, or be able to afford a loan  
          modification.  In these cases, a short sale may be the best  
          option.  Even the federal efforts aimed at loan modification  
          acknowledge the role of short sales.  The U.S. Treasury  
          Department announced, in March of 2010 the Home Affordable  
          Foreclosure Alternatives Program (HAFA).  HAFA provides  
          incentives to borrowers, servicers, and investors who agree to  
          short sale or deed in lieu instead of foreclosures, if a  
          borrower is not eligible for the Home Affordable Modification  
          Program.  HAFA requires that the short sale agreement must  
          include an agreement that once the HAFA short sale is complete  
          that borrowers are released from all further liability under the  
          first mortgage.

          However, and in spite of the use of short sales as a loss  
          mitigation strategy, a disincentive exists under CA law that  
          could, and may have up this point, forced borrowers into  








                                                                  SB 931
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          foreclosure in order to avoid the potential for additional debt  
          that could occur under a short sale.  Due to vagueness in  
          current law a borrower with a non-purchase money loan could  
          become liable for debt under a short sale, where a foreclosure  
          would not result in any additional debt.  Additionally, evidence  
          suggests that some lenders are using language in short sale  
          contracts that states that borrowers would be liable for any  
          difference between the sales price and the amount owed.  This  
          language is sometimes specific, while at other times, vague  
          enough to create legal confusion.

          This bill seeks to clear up any legal confusion between purchase  
          money and non-purchase money loans in regards to short sales by  
          simply providing that the lender may not pursue the borrower for  
          any deficiency that may occur as a result of the short sale when  
          the holder of the note has provided written consent of such  
          agreement.

          Based on information provided to the committee, the following  
          are various scenarios of how borrowers are effected under  
          current law and how this bill would effect them once enacted.


           ----------------------------------------------------------------- 
          |Scenario 1 (the problem this bill is attempting to fix):         |
          |Borrower has first deed of trust for $300,000 and second deed of |
          |trust for $90,000.  Both loans are recourse loans, due to a      |
          |refinancing.                                                     |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |Foreclosure Scenario:           |Short Sale Scenario:  Holder of |
          |Holder of first deed of trust   |first deed of trust agrees to a |
          |forecloses; holder of second    |short sale for fair market      |
          |deed of trust takes no action   |value of $250,000, but states   |
          |and becomes a sold-out junior   |in its approval letter that it  |
          |lienholder.                     |reserves the right to pursue    |
          |                                |the borrower for the difference |
          |                                |between what the property       |
          |                                |fetches at sale and the         |
          |                                |outstanding, unpaid principal   |
          |                                |balance of the loan.  Holder of |
          |                                |second deed of trust agrees to  |
          |                                |the short sale (Note:  the      |
          |                                |holder of the second deed of    |
          |                                |trust must agree to the short   |








                                                                  SB 931
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          |                                |sale, before it may go          |
          |                                |forward).                       |
          |--------------------------------+--------------------------------|
          |Impact on the borrower:  When   |Impact on the borrower:  The    |
          |the holder of the first deed of |holder of the first deed of     |
          |trust forecloses, it has no     |trust may pursue the borrower   |
          |further ability to pursue any   |for $50,000 (the difference     |
          |deficiency under the one form   |between the $300,000 the        |
          |of action rule.  Because the    |borrower owes on the note and   |
          |second deed of trust is a       |the $250,000 the sale           |
          |recourse loan, the sold out     |generates).  Because the second |
          |junior lienholder may pursue    |deed of trust is a recourse     |
          |the borrower for a deficiency   |loan, the sold-out junior       |
          |judgment of $90,000.            |lienholder may pursue the       |
          |                                |borrower for a deficiency       |
          |                                |judgment of $90,000             |
          |--------------------------------+--------------------------------|
          |                                |Net result:  Borrower has       |
          |Net result:  Borrower has       |$140,000 in personal liability  |
          |$90,000 in personal liability.  |and is worse off financially    |
          |                                |under a short sale.             |
           ----------------------------------------------------------------- 
           
           ----------------------------------------------------------------- 
          |Scenario 2 (another example of the problem this bill is trying   |
          |to fix):  Borrower has first deed of trust for $300,000 and      |
          |second deed of trust for $90,000.  Both loans are purchase money |
          |loans and thus non-recourse.                                     |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |Foreclosure Scenario:           |Short Sale Scenario:  Holder of |
          |Holder of first deed of trust   |first deed of trust agrees to a |
          |forecloses.                     |short sale for fair market      |
          |                                |value of $250,000, but states   |
          |                                |in its approval letter that it  |
          |                                |reserves the right to pursue    |
          |                                |the borrower for the difference |
          |                                |between what the property       |
          |                                |fetches at sale and the         |
          |                                |outstanding, unpaid principal   |
          |                                |balance of the loan.            |
          |--------------------------------+--------------------------------|
          |Impact on the borrower:  When   |Impact on the borrower:  The    |
          |the holder of the first deed of |holder of the first deed of     |
          |trust forecloses, it has no     |trust may attempt to pursue the |








                                                                  SB 931
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          |further ability to pursue any   |borrower for $50,000 (the       |
          |deficiency under the one form   |difference between the $300,000 |
          |of action rule.  The holder of  |the borrower owes on the note   |
          |the second deed of trust        |and the $250,000 the sale       |
          |becomes a sold-out junior       |generates).  The question of    |
          |lienholder but lacks any        |whether such an action is       |
          |recourse against the borrower,  |prohibited by CCP 580b has not  |
          |because the loan is             |yet been litigated, and is thus |
          |non-recourse.                   |unresolved.  The holder of the  |
          |                                |second deed of trust agrees to  |
          |                                |the short sale and becomes a    |
          |                                |sold-out junior lienholder, but |
          |                                |lacks any recourse against the  |
          |                                |borrower, because the loan is   |
          |                                |non-recourse                    |
          |--------------------------------+--------------------------------|
          |Net result:  Borrower has $0 in |Net result:  Borrower may have  |
          |personal liability.             |$50,000 in personal liability   |
          |                                |and could be worse off under a  |
          |                                |short sale.                     |
          |                                |                                |
           ----------------------------------------------------------------- 

           ----------------------------------------------------------------- 
          |Scenario 3 (how this bill would work, if enacted):  Borrower has |
          |first deed of trust for $300,000 and second deed of trust for    |
          |$90,000.  Both loans are recourse loans, due to a refinancing.   |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |Foreclosure Scenario:           |Short Sale Scenario:  Holder of |
          |Holder of first deed of trust   |first deed of trust agrees to a |
          |forecloses.                     |short sale for fair market      |
          |                                |value of $250,000 and must      |
          |                                |accept that value as full       |
          |                                |payment.                        |
          |--------------------------------+--------------------------------|
          |Impact on the borrower:  When   |Impact on the borrower:  When   |
          |the holder of the first deed of |the holder of the first deed of |
          |trust forecloses, it has no     |trust agrees in writing to the  |
          |further ability to pursue any   |short sale, it has no further   |
          |deficiency under the one form   |recourse to pursue any          |
          |of action rule.  The holder of  |deficiency against the          |
          |the second deed of trust        |borrower.  The holder of the    |
          |becomes a sold-out junior       |second deed of trust becomes a  |
          |lienholder.  Because the second |sold-out junior lienholder.     |








                                                                  SB 931
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          |deed of trust is a recourse     |Because the second deed of      |
          |loan, the sold out junior       |trust is a recourse loan, the   |
          |lienholder may pursue the       |sold-out junior lienholder may  |
          |borrower for a deficiency       |pursue the borrower for a       |
          |judgment of $90,000.            |deficiency judgment of $90,000  |
          |--------------------------------+--------------------------------|
          |Net result:  Borrower has       |Net result:  Borrower has       |
          |$90,000 in personal liability   |$90,000 in personal liability   |
          |                                |and is not worse off after a    |
          |                                |short sale.                     |
          |                                |                                |
           ----------------------------------------------------------------- 

           ----------------------------------------------------------------- 
          |Scenario 4 (another example of how this bill would work, if      |
          |enacted):  Borrower has first deed of trust for $300,000.  The   |
          |loan is a recourse loan, due to a refinancing.                   |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |Foreclosure Scenario:           |Short Sale Scenario:  Holder of |
          |Holder of first deed of trust   |first deed of trust agrees to a |
          |forecloses.                     |short sale for fair market      |
          |                                |value of $250,000 and must      |
          |                                |accept that value as full       |
          |                                |payment.                        |
          |--------------------------------+--------------------------------|
          |Impact on the borrower:  When   |Impact on the borrower:  When   |
          |the holder of the first deed of |the holder of the first deed of |
          |trust forecloses, it has no     |trust agrees in writing to the  |
          |further ability to pursue any   |short sale, it has no further   |
          |deficiency under the one form   |recourse to pursue any          |
          |of action rule and CCP 580d.    |deficiency against the          |
          |                                |borrower.                       |
          |--------------------------------+--------------------------------|
          |Net result:  Borrower has $0 in |Net result:  Borrower has $0 in |
          |personal liability.             |personal liability and is not   |
          |                                |worse off under a short sale.   |
          |                                |                                |
           ----------------------------------------------------------------- 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Innovative Financial Resources, Inc.








                                                                  SB 931
                                                                  Page  8

          Law Office of Michael Spilger
          Laturno Kuick Ralty
           
            Opposition 
           
          None on file.

           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081