BILL ANALYSIS
SB 1178
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1178 (Corbett) - As Amended: June 3, 2010
SENATE VOTE : 30-4
SUBJECT : MORTGAGE DEFICIENCY JUDGMENTS: REFINANCED LOANS
KEY ISSUE : SHOULD HOMEOWNERS CONTINUE TO ENJOY LONGSTANDING
DEFICIENCY JUDGMENT PROTECTIONS WHEN A HOUSE LOST TO FORECLOSURE
WAS REFINANCED DURING THE BORROWER'S OWNERSHIP OF THE PROPERTY?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Supporters of this bill recall that, contrary to the current
credit crisis, the lending industry not long ago aggressively
marketed home loan refinancing. Unbeknownst to most borrowers,
however, those loans lacked an important protection under
California law enacted in the 1930s, during the last major
economic calamity. For the original loan the homeowner could
not be personally liable for a deficiency judgment if the amount
to the borrower owed the lender exceeded the value of the
property as determined by a judicial foreclosure. Refinancing
caused borrowers to lose that protection against deficiency
judgments. This bill, sponsored by California Association of
Realtors, would extend a borrower's protection against a
deficiency judgment when the original mortgage is refinanced,
but only to the extent that the refinance is used to pay debt
incurred to purchase the property. The lending industry and
debt collectors oppose the bill, arguing that it upsets their
expectations when they sold the refinancing products.
SUMMARY : Reforms deficiency judgment law to protect the many
homeowners who accepted lender offers to refinance their
mortgages. Specifically, this bill provides that longstanding
deficiency judgment protections for a loan used to pay all or
part of the purchase price of real property or an estate for
years includes subsequent loans, mortgages, or deeds of trust
that refinance or modify the original loan to the extent that
the subsequent loan was used to pay debt incurred to purchase
SB 1178
Page 2
the real property.
EXISTING LAW provides that a secured lender under a deed of
trust or mortgage is prevented, following a judicial
foreclosure, from obtaining a deficiency judgment against the
borrower, but only to the extent that the loan is a
purchase-money loan - i.e., the financing is used to initially
acquire the property. (Code Civ. Proc. Sec. 580b.)
COMMENTS : The author explains that the bill is needed because,
unbeknownst to many homeowners, refinancing one's mortgage
causes them to lose their existing "anti-deficiency" protection
in the event of foreclosure. This bill would restore that
protection, but only to the extent that the subsequent loan was
used to pay debt incurred to purchase the property.
The author notes that, when interest rates were low and the
economy was good in recent years, many homeowners chose to
refinance their home loans at a lower rate. However, they were
not aware or made aware that the refinancing would cause them to
lose the anti-deficiency protection on the original loan.
The sponsor, California Association of Realtors (CAR), states:
"It is unfair to subject homeowners to new personal liability
merely because they refinanced the original mortgage.
Similarly, additional acquisition or improvement debt that would
have had the same treatment in the first note should be
similarly protected. The unfairness is particularly acute in
that almost no borrowers understood the new liability that was
being acquired along with the refinance."
Existing Law Protects Only the Original Purchase-Money Loan, Not
Subsequent Refinancing. California has several anti-deficiency
statutes to protect borrowers in real estate transactions.
These statutes protect borrowers when their home is sold in
foreclosure for an amount that is less than what they owe on
their loan. A deficiency is the liability of a borrower to the
lender for the amount of the loan in excess of the value of the
real property, as determined by a judicial foreclosure.
According to the author, Code of Civil Procedure Section 580b
was originally enacted in the 1930s, during the Great
Depression, as part of a package of bills intended to protect
borrowers in financial transactions secured by real property.
The original bill provided that vendors holding purchase money
SB 1178
Page 3
trust deeds were barred from obtaining deficiency judgments. In
1963, the statute was amended to provide that lenders holding
purchase money trust deeds on owner-occupied residential
property were also barred from obtaining deficiency judgments.
As noted above, "purchase money" is generally understood in the
real estate market to mean any of the financing used to acquire
residential property.
In other words, existing law protects residential borrowers
against deficiency liability on their original loan for the
purchase of a home, regardless of the method of foreclosure the
lender uses. However, under current case law, this
anti-deficiency protection is lost if the original loan is
refinanced. Refinancing causes a loan to change from
"non-recourse" - meaning the borrower is not liable for any
deficiency - to a "recourse" loan - meaning the borrower may be
liable for a deficiency. Supporters of this bill believe it is
fair to suppose that, despite the frequent marketing of mortgage
refinancing products by the lending industry, many borrowers may
have been unaware that refinancing eliminated their
anti-deficiency protection.
This bill would protect residential borrowers by preserving
existing law's anti-deficiency protection when loans are
refinanced, but only to the extent that the refinance is used to
pay debt incurred to purchase the real property.
Supporters argue that the same good public policy considerations
underlying existing law should apply to the protection of
mortgage refinancing - that it is a matter of fairness, that
anti-deficiency rules help ensure the quality of loan
underwriting, and that so-called "cash out" refinances deserve
limited protection.
ARGUMENTS IN OPPOSITION : Opponents, representing the lending
industry and collectors, argue that the bill upsets their
expectations regarding existing loans, presumably because the
ability to obtain deficiency judgments was an important element
in the sale of their recent loan refinancing products. They
argue that the bill "fundamentally alters and impairs the nature
of [existing] loan contracts after consummation of the contract
and will lead to negative consequences for those loans held in a
lender's portfolio and will have a deleterious impact on the
secondary market." The lending industry also argues that this
bill will negatively impact the availability of credit.
SB 1178
Page 4
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
CALPIRG
Center for Responsible Lending
Consumers Union
Opposition
California Association of Collectors
California Bankers Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Independent Bankers
California Mortgage Association
California Mortgage Bankers Association
Securities Industry and Financial Markets Association
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334