BILL ANALYSIS
SB 1178
Page 1
SENATE THIRD READING
SB 1178 (Corbett)
As Amended June 3, 2010
Majority vote
SENATE VOTE :30-4
JUDICIARY 8-2
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|Ayes:|Feuer, Tran, Brownley, | | |
| |Evans, Huffman, Jones, | | |
| |Monning, Saldana | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Hagman, Knight | | |
| | | | |
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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
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.
FISCAL EFFECT : None
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.
SB 1178
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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."
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 580(b)
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
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
SB 1178
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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.
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.
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334
FN: 0005107