BILL ANALYSIS
SB 931
Page 1
SENATE THIRD READING
SB 931 (Ducheny)
As Amended June 1, 2010
Majority vote
SENATE VOTE :31-0
BANKING & FINANCE 11-0 JUDICIARY 10-0
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|Ayes:|Eng, Niello, Evans, Fong, |Ayes:|Feuer, Tran, Brownley, |
| |Fuentes, Gaines, Mendoza, | |Evans, Hagman, Huffman, |
| |Nava, Ruskin, Torres, | |Jones, Knight, Monning, |
| |Tran | |Saldana |
| | | | |
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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
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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, 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.
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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."
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
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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
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.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0005086