San Jose Short Sale Agent: Silicon Valley Foreclosure Prevention Specialists

Rather than write my own post about this historic event, the passage of SB 931 - especially after the Governor vetoed SB 1178, another important component of the Anti-Deficiency Protection,  I thought it would be a better idea to simply re-post this fantastic article by the fabulous blogger Elizabeth Weintraub in Sacramento.  Now all we have to do is negotiate away the deficiency on the second trust deeds (mortgages) which can be a bit more challenging.

Here is her well written post about the passage of SB 931.

If a seller in Sacramento, — or anywhere in California for that matter — ever needed a good reason to do a short sale over a foreclosure, the fact that SB 931 was signed into law by Governor Schwarzenegger on Sept. 30th should be reason enough. First lenders can no longer go after a short sale seller of one to four units. Of course, the protection against a deficiency judgment is only for a first trust deed, but it no longer matters whether that first loan was purchase money (non-recourse) or hard money(recourse). It does not apply to subsequent or junior encumbrances.

The provisions of SB 931, which is now added as Section 580e to California Civil Code, prohibits a first lender from pursuing a seller after a short sale. It does not protect those who go through foreclosure. Although purchase money loans are non-recourse, some lawyers have argued that doing a short sale gives a bank certain rights to pursue a seller after a short sale, regardless.

I have received short sale approval letters that address this right and letters that do not. Sellers are not automatically exempt from a deficiency simply because the short sale letter does not address the issue.  SB 931 clears up that confusion.

However, here is the kicker. It applies only to short sales that close on or after January 1, 2011. This could possibly mean that many sellers with only one loan may elect to postpone closing their short sale until January. Of course, sellers  facing an auction really don’t have that luxury. They may have to close or go to foreclosure.

The new anti-deficiency law applies only to one to four units, and the sellers must not have committed fraud or be a corporation or political subdivision of the state.

See previous post about SB 931.

The Governor this week vetoed SB 1178  (anti-deficiency legislation) which passed both the State Assembly and Senate and only required his signature to become law.   This was an important bill which would have brought back the legal protection to homeowners who often did not know they were losing their legal protection when refinancing their mortgages to obtain lower interest rates.

Simply put, when you borrow money to buy your primary residence in California, the nature or the purpose of that money is called “purchase money.”   Purchase money is protected and if, unfortunately, the house goes into foreclosure, the lenders cannot come after the borrower beyond the collateral or the house itself.   This is with all mortgages, you don’t have to purchase this anti-deficiency protection, it is automatic.    And most borrowers understand this to protection to a certain degree.

What most people do not understand is the moment they refinance their loans to take advantage of lower interest rates, that anti-deficiency protection is waived.   Remember, you are not doing a cash-out refinance (this legislation does not protect cash-outs), you are simply re-financing the existing loan to pay off the home, except at a lower rate.  So if the purpose or the nature of the money remains the same: for the purchase of the home, then why should the legal protection against deficiency change?

What does this have to do with interfering with existing contractual relationship as Governor Schwartzenegger claimed?

In these times where lenders are voluntarily freezing their foreclosure efforts due to improper verification of facts and where State Attorney Generals are stepping up their investigation of these matters, Governor Schwartzenegger should be looking out for California homeowners like the Senate and the Assembly, not siding with multi-national lenders.

He certainly played the role of Terminator this week.

This important legislation (SB 1178) passed the California State Assembly and is now heading to Gov. Schwarzenegger’s desk for his signature before it becomes law.   This particular legislation is immensely important during these economically difficult times where homeowners are often facing foreclosure.

This legislation attempts to protect homeowners who, in an effort to obtain lower interest rates through re-financing their loans, lost an important legal protection that limited the lenders to no more than the collateralized property during the foreclosure process. The loss of this protection essentially gave the lending institutions a second bite at the homeowners; not only were they able to take their homes through foreclosure, but they reserved their right to come after the homeowners for the full deficiency value between what was borrowed and what the property eventually sold  for.   The fact that the lenders would not take into consideration the depreciated market value of the property was an additional slap on the face to the distressed and now homeless borrowers.

As a matter of clarification, it is important to point out that this legislation protects the status of those who re-financed their purchase money loan to obtain lower rates.  It DOES NOT protect those homeowners who obtain cash-out loans and do other things like pay down credit cards or start businesses; activities unrelated to the purchase or maintenance of their homes.

As a San Jose Short Sale Agent, I see this heart-breaking scenario more than I care to mention.  Homeowners who simply wanted to lower their interest rates find out during the foreclosure process that they had given up this incredibly important anti-deficiency protection; a protection they certainly would not have given up had they been made aware that a re-finance would trigger said loss.   This is one of those legislations that is the right thing to do.

I had written a little while back about Senate Bill 1178 to extend the anti-deficiency protection to those homeowners who sought to lower their interest rates by re-financing.  Unbeknownst to them, that simple act of wanting to lower their monthly mortgage payments stripped homeowners of an important legal protection.   CAR (California Association of Realtors) sponsored the bill and issued a consumer alert and prompted consumers to contact their local representatives to voice their opinion.

It seems consumers heard and contacted their local politicians.   Now it needs to pass the State Assembly.   This bill would truly address an inequity which needed to be addressed. People should not lose their homes and still be indebted to banks just because of their desire to lower their monthly payments by re-financing their mortgages.

C.A.R. issues consumer alert on refinanced mortgages
C.A.R. issued a consumer alert yesterday warning borrowers of the liability associated with refinanced mortgages.  To help protect consumers, C.A.R. is sponsoring Senate Bill 1178 by State Sen. Ellen Corbett (D-San Leandro) to extend anti-deficiency protections to homeowners who have refinanced “purchase money” loans and now are facing foreclosure. The Senate may vote on the bill as early as next week.

Currently, if a homeowner defaults on a mortgage used to purchase their home, the homeowner’s liability on the mortgage is limited to the property itself.  While this law has helped protect borrowers since its inception in the 1930s, it does not extend the protection for purchase money mortgages to loans that refinance the original purchase debt—even in cases where the loan was refinanced to achieve a lower interest rate.

The above is an alert issued by C.A.R.  (California Association of Realtors)

Most of the clients who come to me to discuss short sales  do a lot of research online and come with the knowledge that California is a Non-Recourse State.  This means the lenders cannot come after the homeowners beyond the property itself (for any deficiency)  if the original intent  the mortgage was to purchase the property, as mentioned above.

What most borrowers  do not realize is that the moment they re-finance to take advantage of lower interest rates, the intent of the money changes to their detriment. Whether the borrower took advantage of a lower interest rate, or cashed out to pay down credit card bills, or to use as down payment on a second property, or to start a business, the nature of the money changes and the protection disappears.   Most loan brokers who were pushing re-finances during the past few years did not inform their clients of the elimination of  this important legal protection.  To be fair, most loan brokers or real estates agents probably were not even aware of such consequences.   But the fact remains,  that for many borrowers, if they were aware of such protection disappearing, perhaps they would not have been so quick to refinance.

SB 1178 is designed to extend that protection once again.   This truly is something that all of us consumers must rally behind, it is simply the right thing to do.   A homeowner should not lose this important legal protection because they want the opportunity at qualifying for lower monthly payments when times are tough.   But guess who is fighting against this measure: the Banks and their lobbyists.

Contact your local State Senator and make sure your voice is heard.   Take back your legal protection.