BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 931|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: SB 931
Author: Ducheny (D)
Amended: 3/25/10
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 4/7/10
AYES: Calderon, Cogdill, Correa, Cox, Florez, Kehoe, Liu,
Lowenthal, Padilla, Price, Runner
NO VOTE RECORDED: Vacancy
SENATE JUDICIARY COMMITTEE : 4-0, 5/4/10
AYES: Corbett, Harman, Hancock, Leno
NO VOTE RECORDED: Walters
SUBJECT : Mortgages: deficiency judgments
SOURCE : Author
DIGEST : This bill requires the holder of a first
mortgage or deed of trust that is secured by residential
real property to accept, as full payment, the proceeds of a
short sale to which it agrees in writing, and obligates
that note holder to fully discharge the remaining amount of
the borrower's indebtedness on the deed of trust or
mortgage following the sale.
ANALYSIS :
Existing law:
CONTINUED
SB 931
Page
2
1. Prohibits a lender from using 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).
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, that
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.
This bill:
1. Provides that no judgment shall be rendered for any
CONTINUED
SB 931
Page
3
deficiency under a note secured by a first deed of trust
or first mortgage for a dwelling of not more than four
units, in any case in which the trustor or mortgagor
(i.e., the borrower) sells the dwelling for less than
the remaining amount of the indebtedness due at the time
of sale, with the written consent of the holder of the
first deed of trust or first mortgage.
2. Provides that written consent of the holder of the first
deed of trust or first mortgage to that short sale
obligates that holder to accept the sale proceeds as
full payment, and to fully discharge the remaining
amount of the indebtedness on the first mortgage or deed
of trust.
3. Provides this bill does not limit the ability of the
holder of a first deed of trust or first mortgage to
seek damages or use existing rights and remedies against
the trustor or mortgagor or a third party, if the
trustor or mortgagor commits fraud, with respect to the
sale of, or waste, with respect to, the real property
that secures the first deed of trust or first mortgage.
Background
A short sale is a real estate transaction in which a lender
allows a borrower to sell his or her home for less than the
full amount the borrower owes on their mortgage. For
example: John owes his mortgage lender $275,000. John's
mortgage lender agrees to let John sell his house for
$225,000, with the understanding that the lender receives
all of the proceeds from the house sale. John avoids
foreclosure. John's lender loses out on $50,000 in
principal to which it was entitled under the provisions of
John's mortgage, but the lender avoids the costs of
foreclosure, and has one less bank-owned property on its
hands.
Short sales have begun to increase in popularity among both
lenders and borrowers, since California's mortgage troubles
first became apparent in early 2007. According to the
California Association of Realtors, there were
approximately 90,000 short sales in California during 2009,
up from only a few thousand in 2008, and a negligible
CONTINUED
SB 931
Page
4
amount in 2007.
Some of the advantages of short sales are summarized above.
One of the other key advantages: negative equity is wiped
out. The new property owner is not saddled with a mortgage
worth far more than the house; if the new owner even holds
a mortgage (some short sales are paid fully in cash), the
size of that mortgage is in line with the fair market value
of the property.
However, as short sales have become more popular, lenders
have become more creative in what they require from
borrowers, as a condition of agreeing to the short sale.
Several lenders are now requiring borrowers to agree that
the lender may pursue them for the difference between the
sales price of their home and their unpaid mortgage balance
(to agree, in other words, to a sort of hybrid short sale,
where the lender temporarily agrees to accept less than the
amount they are owed on the mortgage, but reserves the
right to pursue that borrower for the full amount at some
point in the future).
California Code of Civil Procedure Section 580b and case
law provide that original, purchase money loans are
non-recourse. A non-recourse loan is one on which the
borrower is not personally liable. If the borrower
defaults on a non-recourse loan, the lender can seize the
collateral securing the note, but the lender's recovery is
limited to the collateral. If the value of the collateral
is insufficient to cover the outstanding loan balance, the
difference between the value of the collateral and the
unpaid principal balance of the loan becomes a loss for the
lender.
Some borrowers (particularly those who purchased homes
during the boom years of the early to mid 2000s) took out
both a first mortgage and a second mortgage when they
purchased their homes. If both loans were taken out at the
time of purchase, both are purchase money loans, and both
are considered non-recourse.
Refinanced loans are typically recourse in nature (the one
exception is a scenario in which the borrower refinances a
purchase money loan with the same lender and takes out no
CONTINUED
SB 931
Page
5
additional money, other than money to pay closing costs).
Thus, in most cases, if a borrower refinances one or more
of their purchase money loans, the refinanced mortgage(s)
are considered recourse loans. Recourse loans give the
lender the right to pursue a debtor's personal assets, to
collect the unpaid principal balance of the loan.
California also has what is known as the "one form of
action rule," which is found in Section 726(a) of the Code
of Civil Procedure. The one form of action rule is complex
and embodies a variety of related, but distinct rules and
principals, all of which have been litigated. However, for
purposes of explaining the impact of this bill, the one
form of action rule may generally (and simply) be described
as follows. Under the one form of action rule, a lender
may take only one action to collect on a mortgage or deed
of trust. Thus, if a lender chooses to foreclose, that
lender may not pursue the borrower in court to collect the
difference between the foreclosure price and the loan
amount; the lender's "one form of action" was foreclosure.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
ARGUMENTS IN SUPPORT : According to the Housing
Opportunities Collaborative, many real estate licensees who
assist homeowners with short sales are not fully aware of
how the various scenarios work, and some short sellers are
likely to be surprised in years to come, when collection
agencies and attorneys attempt to collect or obtain
judgments corresponding to the personal liability the short
sellers incurred. The Housing Opportunities Collaborative
asserts that short sales prevent the vacancies that often
follow foreclosures, keep the real estate market moving,
and save banks millions in foreclosure costs and costs
associated with REO properties. They also observe that on
several occasions, homeowners with non-purchase money loans
have been surprised and torn by the financial outcomes that
can result from a short sale. After learning of these
outcomes, "many decide that a short sale just isn't the
smart decision."
JJA:do 5/6/10 Senate Floor Analyses
CONTINUED
SB 931
Page
6
SUPPORT/OPPOSITION: NONE RECEIVED
**** END ****
CONTINUED