BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 458 (Corbett)
As Amended April 4, 2011
Hearing Date: April 12, 2011
Fiscal: No
Urgency: Yes
BCP:rm
SUBJECT
Mortgages: Deficiency Judgments
DESCRIPTION
Existing law prohibits a lender from receiving a judgment for a
deficiency after a short sale on a first mortgage or deed of
trust, as specified. This bill would expand that anti-deficiency
protection for all mortgages or deeds of trust, provided that
the holder of the mortgage or deed of trust consents to the
short sale.
This bill would also restate the above prohibition to clarify
that the provisions do not impact multiple collateral loans.
BACKGROUND
California, as well as the nation, is facing an unprecedented
threat to the economy and housing market due to the high number
of foreclosures occurring throughout the state. While the
initial increase in foreclosures was confined to borrowers with
risky sub-prime mortgages, the subsequent economic downturn has
spread defaults and foreclosures to all types of loans and
borrowers. Those defaults and foreclosures have many causes,
including loss of employment, decreased income due to furloughs,
and increases in payment amounts for certain types of mortgages.
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 a significant decline in housing values,
borrowers who owe more on their home than their house is worth
(more)
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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.
Short sales are becoming increasingly popular - up from a few
thousand in 2008 to approximately 110,000 in California in 2010.
Although borrowers may be under the impression that after a
short sale there is no additional liability for the unpaid
balance of their loan, some lenders are requiring borrowers to
agree that 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
could have greater liability after a short sale than after a
foreclosure, SB 931 (Ducheny, Chapter 701, Statutes of 2010)
prohibited a lender from receiving a judgment for any deficiency
as to the first mortgage or deed of trust following a short
sale. Since SB 931 only applied to first mortgages, those
homeowners with more than one mortgage (typically a first and a
second) could still be liable to a junior noteholder after the
short sale. To address that issue, this bill would apply the
protections of SB 931 to all mortgages, thus, providing full
liability protection for homeowners who receive approval for the
short sale. The bill would also rewrite a portion of the
language of SB 931 in order to clarify that its protections do
not apply to multiple collateral loans.
CHANGES TO EXISTING LAW
Existing law provides for procedures by which a money judgment
(a "deficiency judgment") can be sought for the balance due on
an obligation for the payment of which a deed of trust or
mortgage was given as security. A court may render judgment for
not more than the amount by which the entire amount of
indebtedness due at the time of sale exceeded the fair market
value of the real property or interest therein sold at the time
of sale, with interest from the date of sale, as specified.
(Code Civ. Proc. Sec. 580a.)
Existing law prohibits a deficiency judgment after the sale of
real property under a deed of trust or mortgage on a dwelling
for not more than four families. That provision applies to
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loans that were used to pay all or a part of the purchase price
of the dwelling that was occupied by the purchaser. (Code Civ.
Proc. Sec. 580b.)
Existing law 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.)
Existing law prohibits a deficiency judgment on a note secured
by a first deed of trust or first mortgage on a dwelling of not
more than four units where the dwelling is sold for less than
the remaining amount of indebtedness due at the time of sale
with the written consent of the hold of the first deed of trust
or mortgage. Written consent of the holder obligates that
holder to accept sale proceeds as full payment and to fully
discharge the remaining amount of indebtedness. (Code Civ.
Proc. Sec. 580e(a).)
Existing law provides that if the mortgagee commits fraud with
respect to the sale, or waste with respect to the real property,
the above provision 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. (Code Civ. Proc. Sec. 580e(b).)
Existing law provides that the above protections do not apply if
the trustor or mortgagor is a corporation or political
subdivision of the state. (Code Civ. Proc. Sec. 580e(c).)
This bill would revise the above provisions by striking
reference to "first," thereby applying the protections to all of
the mortgages or deeds of trust secured by the property.
This bill would revise the above language to clarify that
following the voluntary transfer of title, the rights, remedies
and obligations of specified parties shall be treated and
determined as though the dwelling had been sold through
foreclosure under a power of sale contained in the deed of trust
or mortgage for a price equal to the sale proceeds, as
specified.
This bill would additionally state that the section shall not
apply if the trustor or mortgagor is a limited liability
company, limited partnership. The section would also not apply
to any deed of trust, mortgage, or other lien given to secure
the payment of bonds or other evidence of indebtedness
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authorized or permitted to be issued by the Commissioner of
Corporations, or which is made by a public utility subject to
the Public Utilities Act.
This bill would provide that any waiver of the anti-deficiency
provisions in the bill by a covered person shall be void and
against public policy.
COMMENT
1. Stated need for the bill
According to the author:
As the economic crisis continues to impact Californians,
short sales offer an opportunity for a homeowner to avoid
foreclosure. However, current law only affords
"anti-deficiency" protection for the first note or first
deed of trust in the event of a short sale. Current law
does not extend this anti-deficiency protection for junior
notes when a short sale occurs (i.e. second mortgages)?
SB 458 (Corbett) builds upon the protections laid out in
Section 580(e) of the Code of Civil Procedure by protecting
homeowners from deficiency judgments in all loans on a
home, not simply the first note.
The California Association of Realtors, co-sponsor, further
notes that "SB 458 will bring together the desired clarification
of last session's bill Ýregarding multiple collateral loans]
which is currently found in SB 412, Vargas, and adds additional
protections against post-short sale deficiency liability to
junior note holders (seconds) when those lenders approve a short
sale. It is important to note that the short sale process
remains voluntary on every participant's part - only lenders
that actually agree to the sale will be affected, and sellers
that cannot put together an acceptable sale may still go to
foreclosure or even bankruptcy."
2. Applying anti-deficiency short sale protection to all
mortgages
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
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purchase money (nonrecourse) loans that have not been
refinanced. (See Code Civ. Proc. Sec. 580b, 580d.) As a result
of those statutes, concerns were expressed that borrowers whose
homes are sold in foreclosure would receive greater protection
from deficiency judgments than if they were to proceed with a
short sale - most notably from Code of Civil Procedure (CCP)
Section 580d which precludes a deficiency judgment on the
foreclosed loan (generally the first mortgage or deed of trust).
SB 931 addressed that issue by protecting the owner from a
deficiency judgment on their first mortgage or deed of trust, a
step that made short sales arguably equivalent to the protection
provided in non-judicial foreclosures.
From a practical standpoint, limiting the scope of that bill to
only first mortgages had the effect of leaving homeowners with
more than one mortgage (commonly a first and a second) with
potential liability after the short sale. This Committee's
analysis for SB 931 noted:
Since many borrowers do have a first and a second mortgage
(and potentially a HELOCÝ(home equity line of credit)]) -
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 an unsavvy
borrower, ÝSB 931] does serve the goal of ensuring that
borrowers are no worse off when choosing a short sale over
foreclosure. From a public policy standpoint, it is
favorable to have a home sold to a new owner who will upkeep
the property as opposed to potentially reverting back to the
lender at a foreclosure sale.
By removing the language limiting application to first
mortgages, this bill would provide complete liability protection
for owners who successfully complete a short sale. That
protection could, in turn, encourage some owners to proceed with
short sales who may have been hesitant to do so out of concern
about liability to junior lienholders. From a policy
standpoint, encouraging short sales would be beneficial to the
owners of the property (a short sale is perceived as less
damaging to one's credit than a foreclosure), financial
institutions (who do not incur expenses associated with selling
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the property if it goes back to them after a foreclosure sale),
and the surrounding community where neighboring homeowners
benefit from having an actual person buy the property as opposed
to it being sold at foreclosure and remaining vacant for months
as the financial institution attempts to sell the property.
Staff notes that the proposed language would apply the
deficiency judgment protection only after the holders of all the
mortgages or deeds of trust have agreed to the short sale. The
bill is silent on whether a holder can require some sort of
out-of-pocket payment from the homeowner in exchange for his or
her agreement to the short sale. For example, while the holder
of a second mortgage would be unable to go after a former owner
for a deficiency as the result of a short sale, that financial
institution could arguably demand that the homeowner pay $10,000
(outside of the sale proceeds) in exchange for their agreement
to the sale. It should be noted that concealing additional
payments from a senior lender may constitute mortgage fraud
under federal law (18 U.S.C. 1014), and that omitting any
charges paid at settlement by either a buyer or seller from the
HUD-1 Statement could also violate Real Estate Settlement
Procedure Act.
If the Committee elects to address the above situation, the
following amendment would clarify that a holder of a deed of
trust or mortgage shall not receive any compensation from the
homeowner, aside from any proceeds of the sale, in exchange for
the holder's written consent to the short sale. That amendment
would still allow lienholders to negotiate regarding
compensation for consenting to the short sale - for example, a
junior lienholder may want some portion of the sale proceeds
received by the senior lienholder in exchange for consenting to
the sale, or the senior lienholder may opt to pay an additional
amount to the junior lien holder to allow the sale to proceed.
On page 3, line 9, after the period, insert:
A holder of a deed of trust or mortgage shall not require the
trustor or mortgagor to provide any compensation, aside from
any proceeds of the sale, in exchange for that written
consent.
3. Clarifying amendments contained in SB 458
Existing Code of Civil Procedure Section 580e, enacted by SB
931, provides that the written consent of the holder of the
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first deed of trust or mortgage to a short sale obligates the
holder to accept the sale proceeds as full payment and to fully
discharge the remaining amount of indebtedness. Although the
provisions of SB 931 were limited to residential properties with
one to four units, concerns have arisen that the provision
requiring a full discharge of indebtedness could have the
unintended effect of impacting the ability to collect on other
properties in a multiple collateral business loan where a
residence is included as one of the encumbered properties. To
address that issue, this bill includes clarifying language that
would replace the "fully discharge" language with alternative
language treating the deficiency as though the property were
sold through foreclosure.
The following example illustrates the issue: A commercial
lender may require a borrower to provide multiple items of
collateral to secure a business-purpose loan. Some of the
collateral securing the loan may be residential real estate,
and, pursuant to the language of SB 931, if the lender agrees to
a short sale with regards to that residential property, the
lender may technically be required to "fully discharge" the
remaining amount of indebtedness. The potential result of that
interpretation of SB 931 is that a commercial lender may seek to
foreclose on the borrower instead of agreeing to a short sale
out of concern that they may lose their ability to collect on
the remaining amount of the multi-collateral loan.
Staff further notes that the clarification is consistent with
the letter to the Senate Daily Journal by Senator Ducheny on
October 8, 2010. That letter, sent in response to a request
from the California Bankers Association, stated:
Senate Bill 931 is meant to apply to loan transactions with
individuals and is therefore not intended to apply to
commercial loan transactions with legal entities which were
not created as part of an individual's estate planning. As
such, the bill is not intended to apply to residential
subdivision loans and other commercial loans to legal
entities where a single note is secured by multiple
collateral, such as multiple residential 1-4 unit
properties, or a residential 1-4 unit property and a
commercial property, or a residential 1-4 unit property and
a parcel of vacant land. As such, the bill is not intended
to extinguish that portion of the debt obligation that is
secured by another residential, commercial, or vacant land
property, or other personal property related to or used in
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connection with the property.
Although not objecting to the clarification regarding multiple
collateral loans, the Center for Responsible Lending (CRL) and
Housing and Economic Rights Advocates (HERA) have expressed
concern about the removal of the language requiring a full
discharge because it could arguably permit collection efforts to
be made even where no deficiency judgment is available. CRL and
HERA further state:
Under California's related anti-deficiency statutes such as
Cal. Civ. Pro. Code § 580b, mortgage servicers, collection
agencies and debt buyers are currently using abusive tactics
to collect deficiency debt from borrowers even where the
borrower is not legally obligated to pay. Debt collectors
have repeatedly argued that the language prohibiting
deficiency "judgments" in other anti-deficiency statutes
means only that a debt collector is prevented from getting a
court judgment against a borrower. It does not, they argue,
prevent a debt collector from using other means to bully
former homeowners into paying a debt for
which there is no legal recourse.
The prior language of § 580e specifically prevented these
abusive practices by clarifying that debts covered by the
statute were not simply barred from deficiency judgments,
but were completely eliminated. Currently, any collection
efforts on this discharged debt would be prohibited under
state and federal law. As we have seen with debts subject to
§ 580b containing parallel language, the proposed amendment
to § 580e(a) would widely expose consumers to improper
collection efforts on the remaining debt following a short
sale.
Staff notes that the CRL and HERA are working with the author
and sponsors to resolve the above issue.
Support : None Known
Opposition : None Known
HISTORY
Source : California Association of Realtors; California Bankers
Association
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Related Pending Legislation : SB 412 (Vargas) is substantially
similar to SB 458. This bill is current in this Committee.
Prior Legislation : SB 931 (Ducheny, Chapter 701, Statutes of
2010), see Background.
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