BILL ANALYSIS Ó
SB 458
Page 1
Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 458 (Corbett) - As Amended: May 16, 2011
PROPOSED CONSENT
SENATE VOTE : 39-0
SUBJECT : MORTGAGES: DEFICIENCY JUDGMENTS
KEY ISSUE : SHOULD THE LIMITED EXISTING PROTECTION AGAINST
DEFICIENCY JUDGMENTS BE MODESTLY INCREASED FROM FIRST LIENS TO
ADDITIONAL MORTGAGES AND DEEDS OF TRUST?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
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 modest bill would expand that
anti-deficiency protection for mortgages or deeds of trust other
than the first, provided that the holder of the mortgage or deed
of trust consents to the short sale. The bill would also
restate the current prohibition to clarify that the provisions
do not impact multiple collateral loans. The bill is supported
by prominent housing and financial service industry
representatives. There is no opposition.
SUMMARY : Modifies the availability of deficiency judgments.
Specifically, this bill :
1)Revises the procedures by which a money judgment ("deficiency
judgment") can be sought from a homeowner for the balance due
on an obligation for the payment of which a deed of trust or
mortgage was given as security by striking reference to
"first" mortgages and deeds of trust, thereby applying the
protections to all of the mortgages or deeds of trust secured
by the property.
2)Revises the procedures by which a deficiency judgment can be
sought for the balance due on an obligation for payment to
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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.
3)States 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 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.
4)Provides that any waiver of the anti-deficiency provisions in
the bill by a covered person shall be void and against public
policy.
EXISTING LAW :
1)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.)
2)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 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.)
3)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.)
4)Prohibits a deficiency judgment on a note secured by a first
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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 holder 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).)
5)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).)
COMMENTS : 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 of the bill,
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."
Applying Anti-Deficiency Short Sale Protection To All Mortgages.
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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.
Under existing law, borrowers who lose their home in the typical
non-judicial foreclosure process 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, 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.
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. By removing the
language limiting application to first mortgages, this bill
would provide complete liability protection for owners who
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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 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.
It is well known that California is among the hardest hit states
in the nation as the result of the harm created by the collapse
of the speculative "housing bubble," promoted by many in the
housing and financial services industry. (See "Financial Crisis
Inquiry Report: Final Report of the National Commission on the
Causes of the Financial and Economic Crisis in the United
States," January 2011.) Consequently the state is suffering
unprecedented damage to the economy and housing market due to
the high number of foreclosures. While the initial increase in
foreclosures was confined to borrowers with risky sub-prime
mortgages promoted by many lenders, the subsequent economic
downturn has spread defaults and foreclosures to all types of
loans and borrowers, few of whom have been able to obtain loan
modifications from their lenders or servicers despite government
and industry programs to encourage sustainable loans.
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
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.
REGISTERED SUPPORT / OPPOSITION :
SB 458
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Support
California Association of Realtors (co-sponsor)
California Bankers Association (co-sponsor)
California Credit Union League
California Independent Bankers
California Mortgage Association
California Mortgage Bankers Association
California Rural Legal Assistance Foundation
United Trustees Association
Western Center on Law and Poverty
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334