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Governor Schwarzenegger signed into law a bill with new antideficiency protection for homeowners attempting to avert foreclosure, but vetoed another.
A deficiency judgment is a judgment against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by the sale of the security, whichever is greater. See CCP §726(b). In plain English, we are talking about the shortfall between what is owed and the property's selling price at or after foreclosure. For example, when a borrower stops making mortgage payments, the lender may get the property through a foreclosure proceeding and then sells the property to another; a deficiency between the sale price and the outstanding balance of the mortgage gives rise to a deficiency judgment. A deficiency may also arise when a third party directly buys the property at a foreclosure sale and pays less than the outstanding debt owed to the lender.
To protect certain borrowers in this situation, California has powerful "antideficiency" rules that generally shift the risk of loss resulting from a decline in value of real property used as security for a loan from the borrower to the lender. These rules prevent the lender from getting a deficiency judgment against the borrower after a foreclosure in specified circumstances.
Given the dire state of California's real estate market, the legislature was active in passing additional antideficiency protections in 2010. The governor did not, however, let all the new protections through. He vetoed antideficiency protection made applicable to refinanced purchase money loans (see SB 1178), which would have redefined "purchase money" to include "subsequent loans, mortgages, or deeds of trust that refinance or modify the original loan."
The governor did sign SB 931, which enacts CCP §580e, effective January 1, 2011. Section 580e prohibits recovery of a deficiency on a loan secured by a first deed of trust after a short sale for residential real property of four units or less. Short sales are used by borrowers to avert foreclosure and involve selling the property on the open market with the lender's consent for a price that is less than the amount owing on the loan. Note that §580e expressly states it will not prevent a lender from suing the borrower for fraud arising from the short sale or for waste regarding the property.
Antideficiency rules are complex, and many exceptions from the rules exist for junior lenders. See California Mortgages, Deeds of Trust, and Foreclosure Litigation, chap 5 (4th ed Cal CEB 2009). Other exceptions allow lender actions for deficiencies resulting from borrower fraud or waste, Mortgage Deed of Trust Foreclosure, chap 2.
On negotiating short sales and their effects on loan and tax liabilities, see Mortgage Deeds of Trust Foreclosure, chap 7; California Real Estate Brokers: Law and Litigation, chap 2 (Cal CEB 2009); California Real Property Sales Transactions, chap 6 (4th ed Cal CEB 2007).
Also on this topic, check out the CEB program Current Issues in Mortgage Enforcement, available On Demand. This information first appeared on CEB's blog. To receive blog posts by email, subscribe to CEB's blog for free at http://blog.ceb.com.
© The Regents of the University of California, 2010. Unauthorized use and/or duplication of this material without express and written permission from this blog's author and/or owner is strictly prohibited.
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