CAR-Sponsored Bill to Protect Borrowers from Lenders—Call Your State Senator Today
As shared by SFAR:
The California Association of REALTORS® (CAR) is sponsoring SB 1178 (Corbett) to extend anti-deficiency protection to homeowners who had refinanced from “purchase money” loans and are now facing foreclosure.
CAR is sponsoring SB 1178 because most home owners don’t know that when they refinanced from their original loan they lost their legal protections and now may be personally liable for the difference between the value of the foreclosed property and the amount owed to the lender. SB 1178 will be voted on soon by the entire Senate.
California has protected borrowers from so-called “deficiency” liability on their home mortgages since the 1930s, but the evolution of mortgage finance requires that the statute be updated.
Current law says that if a home owner defaults on a mortgage used to purchase his or her home, the home owner’s liability on the mortgage is limited to the property itself. The law has worked well since the 1930s to protect borrowers and ensure the quality of loan underwriting and allow borrowers who are brought down by financial crisis to get back on their feet.
Unfortunately, the 1930s law does not extend the protection for purchase money mortgages to loans that refinance the original purchase debt—even if the refinance was only to gain a lower interest rate. Recent years of low interest rates have induced tens of thousands of home owners to refinance their mortgages, yet almost no one realized that by refinancing their mortgage to obtain a lower rate, they were forfeiting their protections. These borrowers became personally liable for the balance of the loan.
Why CAR Is Sponsoring SB 1178
• SB 1178 is fair. Home buyers, and lenders, entered into the purchase with the idea that the mortgage would be non-recourse debt, and that the lender would look to the security (the house) itself to make good on the debt if the borrower cannot. It meets the legitimate expectation of the borrowers, who have no idea that they are losing this protection by a refinance. Home owners didn’t know that their refinance exposed them to personal liability, and new tax liability, on the note. It would be unfair to allow a lender, or someone that has purchased a note from a lender, to pursue the borrower beyond the value of the agreed upon security.
• Lenders could pursue families to collect this “deficiency debt” years down the road. Under current law, lenders have up to ten years to collect on the additional debt after a judgment has been entered on the foreclosure. Years after a family has lost their home, they could find themselves in even more financial trouble. Lenders could even sell these accounts to aggressive collection agencies or even bundle them into securities. The end result would be banks who didn’t lend responsibly in the first place coming after families for even more money that they don’t have.
• SB 1178 does NOT apply to “cash-out” refinances, unless the money was used to improve the home and it doesn’t apply to HELOCs.
Be part of CAR’s Government Affairs Team and help pass SB 1178.
Please call the two State Senators listed below TODAY and urge them to vote “YES” on SB 1178.
Mark Leno—Call 1-800-672-3135 (PIN #177517646)
Leland Yee—Call 1-800-672-3135 (PIN #199019353)