BILL ANALYSIS
SB 931
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 931 (Ducheny) - As Amended: June 1, 2010
SENATE VOTE : 31-0
SUBJECT : MORTGAGES: DEFICIENCY JUDGMENTS
KEY ISSUE : SHOULD DEFICIENCY JUDGMENTS BE PROHIBITED ON FIRST
MORTGAGES WHERE THE LENDER AGREES TO THE SALE SO THAT SHORT
SALES ARE TREATED SIMILARLY TO FORECLOSURES ON THIS ISSUE?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This non-controversial bill is sponsored by the author to
prohibit a lender from receiving a judgment for deficiency after
a short sale on specified first mortgages where the holder of
the mortgage consents to the short sale. There is similar
protection against such a deficiency judgment when the mortgage
is terminated by foreclosure. Supporters believe this bill
provides appropriate parity so that borrowers do not conclude
that foreclosure is preferable to a short sale, where the lender
consents. The bill has received no recorded opposition.
SUMMARY : Prohibits a judgment for any deficiency under a note
secured by a first mortgage or deed of trust in any case where
the trustor or mortgagor (borrower) sells the dwelling for less
than the remaining amount of indebtedness due at the time of
sale. Specifically, this bill:
1)Provides that the consent of the holder of the first deed of
trust or first mortgage to that sale obligates that holder to
accept the sale proceeds as full payment and to fully
discharge the remaining amount of indebtedness.
2)Applies the foregoing prohibition only if the sale is with the
written consent of the holder of the first deed of trust or
first mortgage.
3)Further provides that if the trustor or mortgagor commits
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either fraud with respect to the sale of, or waste with
respect to, the real property that secures the first mortgage
or deed of trust, the above prohibition 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, as
specified.
4)This act does not apply if the trustor or mortgagor is a
corporation or political subdivision of the state.
EXISTING LAW:
1)Prohibits a deficiency judgment after a sale of real property
under a purchase money mortgage or deed of trust that secures
a residential dwelling of not more than four units. (Code
Civ. Proc. Sec. 580b.)
2)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.)
COMMENTS : The author explains the reason for the bill with
reference to the extraordinary number of foreclosures occurring
throughout the state. The author notes that 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
significant declines 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.
According to the author, short sales are becoming increasingly
popular - up from a few thousand in 2008 to approximately 90,000
in California in 2009. The author notes that borrowers may be
under the impression that after a short sale there is no
additional liability for the unpaid balance of their loan.
However, some lenders are now requiring borrowers to agree that
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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 may have greater
liability after a short sale than after a foreclosure, this bill
would prohibit a lender from receiving a judgment for deficiency
after a short sale on first mortgages or deeds of trust.
Anti-Deficiency Protection In Short Sales And Foreclosures.
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
purchase money (nonrecourse) loans that have not been
refinanced. (See Code Civ. Proc. Sec. 580b, 580d.) As a result
of those statutes, borrowers whose homes are sold in foreclosure
arguably receive greater protection from deficiency judgments
than if they were to proceed with a short sale because there is
no specific protection against a deficiency judgment in a short
sale as there is on a foreclosed loan (generally the first
mortgage or deed of trust). Since there is no equivalent of
Section 580d that is specific to short sales, the author asserts
that some borrowers have a logical, financially sound reason to
opt for foreclosure over short sale, and asserts that the bill
would address that issue by ensuring that borrowers do not have
a higher amount of liability after a short sale than a
foreclosure sale.
This bill prohibits judgments for deficiency in the context of a
short sale, provided that certain conditions are met. That
prohibition would be limited to first mortgages or deeds of
trusts (excluding, second mortgages, home equity lines of
credit, etc.), and would apply only to residential real property
with one to four dwelling units. Because lenders generally
foreclose on the first mortgage or deed of trust (for which CCP
Sec. 580d would prohibit a deficiency judgment in the case of a
nonjudicial foreclosure), the bill would appear to equalize
anti-deficiency protection between short sales and foreclosures.
This Bill Depends On Lender Approval. The anti-deficiency
protection proposed by this bill is conditioned upon written
consent of the holder of the first deed of trust or mortgage to
the sale. Once that consent is given, the holder is obligated
to accept sale proceeds as full payment and to fully discharge
the remaining amount of indebtedness on that deed of trust or
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mortgage. Supporters further note that while the short sale
will appear as "settled debt" on the borrower's credit report,
which may hurt their credit rating, the short sale "helps the
homeowner feel like they took responsibility for the obligation
to pay the money back, rather than just walking away."
The Bill Is Limited To First Mortgages. Since many borrowers do
have a first and a second mortgage (and potentially a home
equity line), 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 many borrowers, the
bill would appear to serve its limited goal of ensuring that
borrowers are no worse off when choosing a short sale over
foreclosure.
Exemption For Waste Or Fraud. The bill would also provide that
if the borrower commits fraud with respect to the sale of, or
waste with respect to the real property itself, the new
deficiency protection shall not limit the ability of the lender
to seek damages and use existing rights and remedies against the
borrower or any third party. The author asserts that this
provision seeks to preserve an existing exemption under case law
for fraud or waste - the provision was inserted after concerns
arose that this bill would remove that exemption.
Potential Benefits For Real Estate Market . Supporters further
contend that this bill would prevent further litigation against
real estate professionals (who may not be aware of the potential
risks of a short sale), encourage short sales which serves the
public policy goal of keeping the real estate market moving, and
diminish the potential for long term collections and lawsuits.
REGISTERED SUPPORT / OPPOSITION :
Support
Four individuals
Opposition
SB 931
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None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334