BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 931 (Ducheny)
          As Amended  June 1, 2010
          Majority vote 

           SENATE VOTE  :31-0  
           
           BANKING & FINANCE   11-0        JUDICIARY           10-0        
           
           ----------------------------------------------------------------- 
          |Ayes:|Eng, Niello, Evans, Fong, |Ayes:|Feuer, Tran, Brownley,    |
          |     |Fuentes, Gaines, Mendoza, |     |Evans, Hagman, Huffman,   |
          |     |Nava, Ruskin, Torres,     |     |Jones, Knight, Monning,   |
          |     |Tran                      |     |Saldana                   |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           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  








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            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, 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.








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          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."

          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  








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          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  
          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.


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


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