BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 931
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          Date of Hearing:   June 29, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 931 (Ducheny) - As Amended:  June 1, 2010

           SENATE VOTE :  31-0
           
          SUBJECT  :  MORTGAGES: DEFICIENCY JUDGMENTS

           KEY ISSUE  :  SHOULD DEFICIENCY JUDGMENTS BE PROHIBITED ON FIRST  
          MORTGAGES WHERE THE LENDER AGREES TO THE SALE SO THAT SHORT  
          SALES ARE TREATED SIMILARLY TO FORECLOSURES ON THIS ISSUE?

           FISCAL EFFECT  :  As currently in print this bill is keyed  
          non-fiscal.
                                          
                                      SYNOPSIS

          This non-controversial bill is sponsored by the author to  
          prohibit a lender from receiving a judgment for deficiency after  
          a short sale on specified first mortgages where the holder of  
          the mortgage consents to the short sale.  There is similar  
          protection against such a deficiency judgment when the mortgage  
          is terminated by foreclosure.  Supporters believe this bill  
          provides appropriate parity so that borrowers do not conclude  
          that foreclosure is preferable to a short sale, where the lender  
          consents.  The bill has received no recorded opposition.

           SUMMARY  :  Prohibits a judgment for any deficiency under a note  
          secured by a first mortgage or deed of trust in any case where  
          the trustor or mortgagor (borrower) sells the dwelling for less  
          than the remaining amount of indebtedness due at the time of  
          sale.  Specifically,  this bill:  

          1)Provides that the consent of the holder of the first deed of  
            trust or first mortgage to that sale obligates that holder to  
            accept the sale proceeds as full payment and to fully  
            discharge the remaining amount of indebtedness.

          2)Applies the foregoing prohibition only if the sale is with the  
            written consent of the holder of the first deed of trust or  
            first mortgage.

          3)Further provides that if the trustor or mortgagor commits  








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            either fraud with respect to the sale of, or waste with  
            respect to, the real property that secures the first mortgage  
            or deed of trust, the above prohibition shall not limit the  
            ability of the holder of the first deed of trust or mortgage  
            to seek damages and use existing rights and remedies, as  
            specified.

          4)This act does not apply if the trustor or mortgagor is a  
            corporation or political subdivision of the state.

           EXISTING LAW:

           1)Prohibits a deficiency judgment after a sale of real property  
            under a purchase money mortgage or deed of trust that secures  
            a residential dwelling of not more than four units.  (Code  
            Civ. Proc. Sec. 580b.)

          2)Prohibits a deficiency judgment on a note secured by a deed of  
            trust or mortgage in any case in which the property has been  
            sold by the mortgagee or trustee (lender) under a power of  
            sale contained in the mortgage or deed of trust.  (Code of  
            Civ. Proc. Sec. 580d.)

           COMMENTS  :  The author explains the reason for the bill with  
          reference to the extraordinary number of foreclosures occurring  
          throughout the state.  The author notes that some borrowers who  
          are unable to make their loan payments and unable to get an  
          affordable loan modification may attempt to sell their home as  
          an alternative to going through foreclosure.  As a result of  
          significant declines in housing values, borrowers who owe more  
          on their home than their house is worth must attempt a "short  
          sale" if they want to sell their home. (A short sale is a real  
          estate transaction in which a lender permits a borrower to sell  
          their home for less than is owed on the mortgage.)  While the  
          lender receives less than the full value of the loan in a short  
          sale, the lender avoids the costs of both the foreclosure and  
          resulting expenses if the property ends up becoming bank-owned  
          after foreclosure.

          According to the author, short sales are becoming increasingly  
          popular - up from a few thousand in 2008 to approximately 90,000  
          in California in 2009.  The author notes that borrowers may be  
          under the impression that after a short sale there is no  
          additional liability for the unpaid balance of their loan.   
          However, some lenders are now requiring borrowers to agree that  








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          the lender can pursue them for the difference between the sale  
          price of their home and the unpaid balance.  In response to  
          concerns about this practice and that borrowers may have greater  
          liability after a short sale than after a foreclosure, this bill  
          would prohibit a lender from receiving a judgment for deficiency  
          after a short sale on first mortgages or deeds of trust.

           Anti-Deficiency Protection In Short Sales And Foreclosures.    
          Under existing law, borrowers who lose their home in foreclosure  
          receive "anti-deficiency" protection under several different  
          statutes.  Those statutes generally prevent a judgment for the  
          deficiency on the note that has been foreclosed upon, and for  
          purchase money (nonrecourse) loans that have not been  
          refinanced.  (See Code Civ. Proc. Sec. 580b, 580d.)  As a result  
          of those statutes, borrowers whose homes are sold in foreclosure  
          arguably receive greater protection from deficiency judgments  
          than if they were to proceed with a short sale because there is  
          no specific protection against a deficiency judgment in a short  
          sale as there is on a foreclosed loan (generally the first  
          mortgage or deed of trust).  Since there is no equivalent of  
          Section 580d that is specific to short sales, the author asserts  
          that some borrowers have a logical, financially sound reason to  
          opt for foreclosure over short sale, and asserts that the bill  
          would address that issue by ensuring that borrowers do not have  
          a higher amount of liability after a short sale than a  
          foreclosure sale.

          This bill prohibits judgments for deficiency in the context of a  
          short sale, provided that certain conditions are met.  That  
          prohibition would be limited to first mortgages or deeds of  
          trusts (excluding, second mortgages, home equity lines of  
          credit, etc.), and would apply only to residential real property  
          with one to four dwelling units.  Because lenders generally  
          foreclose on the first mortgage or deed of trust (for which CCP  
          Sec. 580d would prohibit a deficiency judgment in the case of a  
          nonjudicial foreclosure), the bill would appear to equalize  
          anti-deficiency protection between short sales and foreclosures.  
           

           This Bill Depends On Lender Approval.   The anti-deficiency  
          protection proposed by this bill is conditioned upon written  
          consent of the holder of the first deed of trust or mortgage to  
          the sale.  Once that consent is given, the holder is obligated  
          to accept sale proceeds as full payment and to fully discharge  
          the remaining amount of indebtedness on that deed of trust or  








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          mortgage.  Supporters further note that while the short sale  
          will appear as "settled debt" on the borrower's credit report,  
          which may hurt their credit rating, the short sale "helps the  
          homeowner feel like they took responsibility for the obligation  
          to pay the money back, rather than just walking away."  

           The Bill Is Limited To First Mortgages.   Since many borrowers do  
          have a first and a second mortgage (and potentially a home  
          equity line), the limitation of the bill's anti-deficiency  
          protection to first mortgages or deeds of trust would not  
          relieve all borrowers of all future liability after short sale.   
          If not precluded by the short sale contract or other existing  
          anti-deficiency statutes, those other lenders may be able to  
          pursue the borrower for any deficiency that may exist with  
          regards to their additional loans.  Despite that potential  
          liability, which may come as a surprise to many borrowers, the  
          bill would appear to serve its limited goal of ensuring that  
          borrowers are no worse off when choosing a short sale over  
          foreclosure.  

           Exemption For Waste Or Fraud.   The bill would also provide that  
          if the borrower commits fraud with respect to the sale of, or  
          waste with respect to the real property itself, the new  
          deficiency protection shall not limit the ability of the lender  
          to seek damages and use existing rights and remedies against the  
          borrower or any third party.  The author asserts that this  
          provision seeks to preserve an existing exemption under case law  
          for fraud or waste - the provision was inserted after concerns  
          arose that this bill would remove that exemption.
           
          Potential Benefits For Real Estate Market  .  Supporters further  
          contend that this bill would prevent further litigation against  
          real estate professionals (who may not be aware of the potential  
          risks of a short sale), encourage short sales which serves the  
          public policy goal of keeping the real estate market moving, and  
          diminish the potential for long term collections and lawsuits. 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Four individuals
           
            Opposition 
           








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          None on file


           Analysis Prepared by  :    Kevin G. Baker / JUD. / (916) 319-2334