BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 1069 (Corbett)
As Amended March 15, 2012
Hearing Date: May 1, 2012
Fiscal: No
Urgency: No
SK:rm
SUBJECT
Mortgages: Deficiency Judgments
DESCRIPTION
This bill would prohibit a lender from receiving a deficiency
judgment for any loan, refinance, or other credit transaction
that is used to refinance a purchase money loan.
This bill would apply only to credit transactions occurring on
or after January 1, 2013, and would not apply to the principal
amount of any new advance, as specified.
BACKGROUND
California has several anti-deficiency statutes that seek to
protect individuals from a "deficiency judgment" when their home
is sold for less than is owed on their loan. Absent those
statutes, a lender who suffers a loss as the result of the sale
(in other words, selling the property for less than the balance
of the loan) could potentially bring an action seeking recovery
of the amount lost, the "deficiency," as the result of the sale.
For example, one section bars a lender from seeking a judgment
for any deficiency following a non-judicial foreclosure. That
protection is limited to the specific note that was foreclosed
upon. (Code Civ. Proc. Sec. 580d.) Another section protects
borrowers from a deficiency judgment in the case of a short
sale. (Code Civ. Proc. Sec. 580e.)
This bill, sponsored by the Insolvency Law Committee of the
Business Law Section of the State Bar, would amend a related
section that provides broad protection from deficiency
(more)
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judgments. That section prohibits a deficiency judgment for
loans that were used to "pay all or part of the purchase price."
(Those loans are often referred to as "purchase money.") That
protection, which applies after sale of the property, is limited
to loans securing owner-occupied dwellings of not more than four
families. Staff notes that while many argue that the provision
is limited to judicial foreclosures, some legal experts contend
that the plain language of the statute allows application beyond
that context to other types of sales.
Under existing case law, the above deficiency protection is
arguably lost when an individual refinances his or her mortgage.
In other words, refinancing may cause 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. To address that issue, this bill would
preserve the above anti-deficiency protection when loans are
refinanced, except to the extent the lender or creditor advanced
new principal.
This bill is similar to SB 1178 (Corbett, 2010), which was
vetoed by Governor Schwarzenegger due to concerns about, among
other things, interference with existing contracts. This bill
seeks to address those issues by only applying prospectively to
loans executed on or after January 1, 2013.
CHANGES TO EXISTING LAW
Existing federal tax law generally allows a deduction for all
interest paid or accrued within the taxable year on
indebtedness. Existing law limits that deduction for "personal
interest" paid or accrued, with the specific exceptions,
including any qualified residence interest. (26 U.S.C. 163.)
Existing federal tax law defines qualified residence interest as
any interest that is paid or accrued during the taxable year on
either: (1) acquisition indebtedness; or (2) home equity
indebtedness. Acquisition indebtedness is defined as
indebtedness that is incurred in acquiring, constructing, or
substantially improving a qualified residence of the taxpayer,
and that is secured by that residence. That term also includes
any indebtedness secured by such residence resulting from the
refinancing of indebtedness, as specified, but only to the
extent the amount of the indebtedness resulting from such
refinancing does not exceed the amount of the refinanced
indebtedness. (26 U.S.C. 163(h)(3)(B).)
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Existing law provides for procedures by which a money judgment
(a "deficiency judgment") can be sought for the balance due on
an obligation for the payment for which a deed of trust or
mortgage was given as security. A court may render judgment for
not more than the amount by which the entire amount of
indebtedness due at the time of sale exceeded the fair market
value of the real property or interest therein sold at the time
of sale, with interest from the date of sale, as specified.
(Code Civ. Proc. Sec. 580a.)
Existing law prohibits a deficiency judgment after the sale of
real property under a deed of trust or mortgage on a dwelling
for not more than four families. That provision applies to
loans that were used to pay all or a part of the purchase price
of the dwelling that was occupied by the purchaser. (Code Civ.
Proc. Sec. 580b.)
This bill would apply the above deficiency judgment prohibition
to any loan, refinance, or other credit transaction that is used
to refinance a purchase money loan, as defined, except to the
extent that the lender or creditor advances new principal, as
specified.
This bill would provide that any new credit transaction shall be
deemed to be a purchase money loan except as to the principal
amount of any new advance. Payment of principal shall be deemed
to be applied first to the principal balance of the purchase
money loan and then to the principal balance of any new advance;
interest payments shall be applied to any interest due and
owing.
This bill would apply the above provisions only to credit
transactions executed on or after January 1, 2013.
COMMENT
1. Stated need for the bill
According to the author:
Under current state law, lenders may seek a deficiency
judgment in a judicial foreclosure for a non-purchase money
loan. Refinanced loans are considered non-purchase. It is
unfair to subject homeowners to new personal liability
merely because they refinanced the original mortgage.
California has extended protection from deficiency judgments
to homeowners in the event of a short sale with the
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enactment of Senate Bill 458 (Corbett, 2011) and Senate Bill
931 (Ducheny, 2010). The unfairness is particularly acute in
that almost no borrowers understood the new liability that
was being acquired along with the refinance.
The author further notes that, "�a]ccording to recent news by
the Mortgage Bankers Association �MBA], applications for
refinances continue to steadily increase as homeowners attempt
to take �advantage] of lower interest rates. . . . Data from
MBA also notes that the refinanced loans continue to make up a
significant, if not majority, of mortgage originations
nationwide. Indeed, over two-thirds of mortgage originations
derived from refinances, accounting for about $1.7 trillion of
total mortgages since 2010."
2. Background on the deficiency judgments at issue; codifying
protection for refinances
Under existing law, when an individual takes out a loan to
purchase a home, that loan is protected from a deficiency
judgment under Code of Civil Procedure 580b. Since there can be
no deficiency judgment following a "sale" of the property, the
loan is considered to be "non-recourse" and the borrower has no
personal liability following the sale of the property. On the
other hand, if the borrower subsequently takes out a home equity
loan, or another loan that is not used to purchase the property,
that loan is considered "recourse" because the borrower could
potentially have personal liability following sale. Despite
that distinction, staff notes that there are several deficiency
judgment statutes that may provide protection even in cases
where a "recourse" loan is subject to foreclosure.
While the above deficiency judgment protection reflects a desire
by the Legislature to limit financial liability for homeowners
following the sale of their home, subsequent case law has
arguably held that a homeowner who refinances his or her
original loan loses their Section 580b protection against
deficiency judgments. Specifically, in Union Bank v. Wendland
(1976) 54 Cal.App.3d 393, the Court of Appeal noted that:
Section 580b was drafted to protect purchasers under the
standard purchase money mortgage transactions in which the
vendor of real property retains an interest in the land sold
to secure payment of part of the purchase price ?.
"Variations on the standard are subject to section 580b only
if they come within the purpose of that section." ?. The loan
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transactions with �the refinancing lender] are variations from
the standard that do not come within the purpose of section
580b. Accordingly, when �the homeowner] refinanced the
property ? he lost the purchase money protection afforded by
section 580b. (54 Cal.App.3d at 399-400, citations omitted
and emphasis added.)
This bill seeks to respond to that case by clarifying that no
deficiency judgment shall lie on any loan, refinance, or other
credit transaction which is used to refinance a "purchase money
loan," except to the extent the lender advances new principal
that is not used to satisfy the purchase money loan, or to fees,
costs, or related expenses of the transaction.
3. Application of bill's provisions
This bill would generally preserve the non-recourse nature of
purchase money loans in the case of a refinance. As noted by
the author, a large number of mortgage originations occur due to
refinances and the individuals who refinance their loans are
generally unaware that the refinance itself may result in the
loss of anti-deficiency protection under Section 580b. The
proposed protection for refinances would: (1) only apply to
those credit transactions occurring on or after January 1, 2013;
and (2) not protect any additional money taken out by the
homeowner as part of the refinance.
a. Amounts owed under original loan plus fees
The anti-deficiency protection provided by this bill would not
apply to any additional funds that are taken out by the
borrower as part of the refinance, unless that amount is
applied to "fees, costs, or related expenses of the credit
transaction." While that protection ensures that the original
loan doesn't change its nature due to the refinance, it may
leave homeowners with anti-deficiency liability for moneys
taken out for things ranging from vacations to completing
necessary repairs on their homes.
For example, a refinance of a purchase money loan occurring on
or after January 1, 2013, where no additional money is taken
out, would be fully covered under the provisions of this bill.
Alternatively, if a homeowner refinanced the same property
but elected to take out additional moneys in order to replace
a leaking roof, this bill's anti-deficiency provisions would
not protect the "new advance."
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b. Credit transactions on or after January 1, 2013
The provisions of this bill would only apply to credit
transactions occurring on or after January 1, 2013. While
prospective application of SB 1069 would not cover the
numerous individuals who refinanced in recent years to either
take advantage of lower interest rates or avoid foreclosure,
it would appear to respond to concerns raised in Governor
Schwarzenegger's veto of SB 1178 by applying retrospectively.
The veto message stated:
�SB 1178] fundamentally alters the nature and impairs the
value of previously negotiated contracts, leading to
negative consequences for the value of those loans held
in a lender's portfolio and a deleterious impact on the
secondary market. Fundamentally altering the nature of a
contract after its consummation is a bad precedent and
will provide uncertainty for future lending transactions.
Support : California Association of Realtors; California Bankers
Association; Center for Responsible Lending
Opposition : None Known
HISTORY
Source : Insolvency Law Committee of the Business Law Section of
the State Bar
Related Pending Legislation : None Known
Prior Legislation :
SB 1178 (Corbett, 2010) See Background.
SB 458 (Corbett, Chapter 82, Statutes of 2011) expanded
anti-deficiency protection for short sales.
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