BILL ANALYSIS
SB 931
Page 1
Date of Hearing: June 21, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 931 (Ducheny) - As Amended: June 1, 2010
SENATE VOTE : 31-0
SUBJECT : Mortgages: deficiency judgments
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
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).
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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.
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."
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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
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
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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.
Based on information provided to the committee, the following
are various scenarios of how borrowers are effected under
current law and how this bill would effect them once enacted.
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|Scenario 1 (the problem this bill is attempting to fix): |
|Borrower has first deed of trust for $300,000 and second deed of |
|trust for $90,000. Both loans are recourse loans, due to a |
|refinancing. |
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|--------------------------------+--------------------------------|
|Foreclosure Scenario: |Short Sale Scenario: Holder of |
|Holder of first deed of trust |first deed of trust agrees to a |
|forecloses; holder of second |short sale for fair market |
|deed of trust takes no action |value of $250,000, but states |
|and becomes a sold-out junior |in its approval letter that it |
|lienholder. |reserves the right to pursue |
| |the borrower for the difference |
| |between what the property |
| |fetches at sale and the |
| |outstanding, unpaid principal |
| |balance of the loan. Holder of |
| |second deed of trust agrees to |
| |the short sale (Note: the |
| |holder of the second deed of |
| |trust must agree to the short |
SB 931
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| |sale, before it may go |
| |forward). |
|--------------------------------+--------------------------------|
|Impact on the borrower: When |Impact on the borrower: The |
|the holder of the first deed of |holder of the first deed of |
|trust forecloses, it has no |trust may pursue the borrower |
|further ability to pursue any |for $50,000 (the difference |
|deficiency under the one form |between the $300,000 the |
|of action rule. Because the |borrower owes on the note and |
|second deed of trust is a |the $250,000 the sale |
|recourse loan, the sold out |generates). Because the second |
|junior lienholder may pursue |deed of trust is a recourse |
|the borrower for a deficiency |loan, the sold-out junior |
|judgment of $90,000. |lienholder may pursue the |
| |borrower for a deficiency |
| |judgment of $90,000 |
|--------------------------------+--------------------------------|
| |Net result: Borrower has |
|Net result: Borrower has |$140,000 in personal liability |
|$90,000 in personal liability. |and is worse off financially |
| |under a short sale. |
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|Scenario 2 (another example of the problem this bill is trying |
|to fix): Borrower has first deed of trust for $300,000 and |
|second deed of trust for $90,000. Both loans are purchase money |
|loans and thus non-recourse. |
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|--------------------------------+--------------------------------|
|Foreclosure Scenario: |Short Sale Scenario: Holder of |
|Holder of first deed of trust |first deed of trust agrees to a |
|forecloses. |short sale for fair market |
| |value of $250,000, but states |
| |in its approval letter that it |
| |reserves the right to pursue |
| |the borrower for the difference |
| |between what the property |
| |fetches at sale and the |
| |outstanding, unpaid principal |
| |balance of the loan. |
|--------------------------------+--------------------------------|
|Impact on the borrower: When |Impact on the borrower: The |
|the holder of the first deed of |holder of the first deed of |
|trust forecloses, it has no |trust may attempt to pursue the |
SB 931
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|further ability to pursue any |borrower for $50,000 (the |
|deficiency under the one form |difference between the $300,000 |
|of action rule. The holder of |the borrower owes on the note |
|the second deed of trust |and the $250,000 the sale |
|becomes a sold-out junior |generates). The question of |
|lienholder but lacks any |whether such an action is |
|recourse against the borrower, |prohibited by CCP 580b has not |
|because the loan is |yet been litigated, and is thus |
|non-recourse. |unresolved. The holder of the |
| |second deed of trust agrees to |
| |the short sale and becomes a |
| |sold-out junior lienholder, but |
| |lacks any recourse against the |
| |borrower, because the loan is |
| |non-recourse |
|--------------------------------+--------------------------------|
|Net result: Borrower has $0 in |Net result: Borrower may have |
|personal liability. |$50,000 in personal liability |
| |and could be worse off under a |
| |short sale. |
| | |
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|Scenario 3 (how this bill would work, if enacted): Borrower has |
|first deed of trust for $300,000 and second deed of trust for |
|$90,000. Both loans are recourse loans, due to a refinancing. |
-----------------------------------------------------------------
|--------------------------------+--------------------------------|
|Foreclosure Scenario: |Short Sale Scenario: Holder of |
|Holder of first deed of trust |first deed of trust agrees to a |
|forecloses. |short sale for fair market |
| |value of $250,000 and must |
| |accept that value as full |
| |payment. |
|--------------------------------+--------------------------------|
|Impact on the borrower: When |Impact on the borrower: When |
|the holder of the first deed of |the holder of the first deed of |
|trust forecloses, it has no |trust agrees in writing to the |
|further ability to pursue any |short sale, it has no further |
|deficiency under the one form |recourse to pursue any |
|of action rule. The holder of |deficiency against the |
|the second deed of trust |borrower. The holder of the |
|becomes a sold-out junior |second deed of trust becomes a |
|lienholder. Because the second |sold-out junior lienholder. |
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|deed of trust is a recourse |Because the second deed of |
|loan, the sold out junior |trust is a recourse loan, the |
|lienholder may pursue the |sold-out junior lienholder may |
|borrower for a deficiency |pursue the borrower for a |
|judgment of $90,000. |deficiency judgment of $90,000 |
|--------------------------------+--------------------------------|
|Net result: Borrower has |Net result: Borrower has |
|$90,000 in personal liability |$90,000 in personal liability |
| |and is not worse off after a |
| |short sale. |
| | |
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-----------------------------------------------------------------
|Scenario 4 (another example of how this bill would work, if |
|enacted): Borrower has first deed of trust for $300,000. The |
|loan is a recourse loan, due to a refinancing. |
-----------------------------------------------------------------
|--------------------------------+--------------------------------|
|Foreclosure Scenario: |Short Sale Scenario: Holder of |
|Holder of first deed of trust |first deed of trust agrees to a |
|forecloses. |short sale for fair market |
| |value of $250,000 and must |
| |accept that value as full |
| |payment. |
|--------------------------------+--------------------------------|
|Impact on the borrower: When |Impact on the borrower: When |
|the holder of the first deed of |the holder of the first deed of |
|trust forecloses, it has no |trust agrees in writing to the |
|further ability to pursue any |short sale, it has no further |
|deficiency under the one form |recourse to pursue any |
|of action rule and CCP 580d. |deficiency against the |
| |borrower. |
|--------------------------------+--------------------------------|
|Net result: Borrower has $0 in |Net result: Borrower has $0 in |
|personal liability. |personal liability and is not |
| |worse off under a short sale. |
| | |
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REGISTERED SUPPORT / OPPOSITION :
Support
Innovative Financial Resources, Inc.
SB 931
Page 8
Law Office of Michael Spilger
Laturno Kuick Ralty
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081