C.A.R. calls for swift passage of SB 1178 extending anti-deficiency protection for consumers
Measure would protect consumers from unscrupulous lenders
LOS ANGELES, CA – May 20, 2010 – (RealEstateRama) — The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) is calling on California state senators to vote “yes” and approve SB 1178 (D-Corbett), which will extend anti-deficiency protection for consumers who have refinanced their original mortgage loans and now are facing foreclosure. C.A.R. is the sponsor of the legislation.
“Most homeowners don’t know that when they refinanced their original loan they lost critical legal protections and now may be personally liable for the difference between the value of their foreclosed property and the amount they owe the lender,” said C.A.R. President Steve Goddard. “If a foreclosed home’s market value is $250,000 and the balance on the refinanced loan is $350,000, the homeowner is personally liable for the $100,000 difference under existing law.”
Currently, if a homeowner defaults on a mortgage used to purchase his or her home — known as a “purchase money mortgage” — the homeowner’s liability on the mortgage is limited to the property itself. The law has worked well since the 1930s to protect borrowers, ensure the quality of loan underwriting, and allow borrowers brought down by financial crisis to get back on their feet. Unfortunately, the original law did not extend the purchase money protection to loans that refinance the original purchase debt, even if the refinance only was to obtain a lower interest rate.
Although California has protected borrowers from so-called “deficiency” liability on their home mortgages since the 1930s, the evolution of mortgage finance requires that the statute be updated.
“Current events demonstrate there has been no shortage of inadequate underwriting by mortgage lenders, the banking industry, and others preying on unsuspecting and uninformed consumers,” Goddard said. “Passage of SB 1178 will force lenders to underwrite refinance loans at least as carefully as purchase money mortgages.
“If lenders are allowed to look beyond the property actually being taken as security, and make the decision to lend based upon the borrower’s other assets, it erodes their incentive to make certain that the loan “pencils out” and has adequate security,” he said. “If a lender only can look to the value of the home being financed, the underwriter will be more careful about the value of the asset. The same reasoning should apply to refinanced loans. Without SB 1178’s protections in place, if the borrower has any other assets, the lender can go after the borrower and demand a deficiency.
“Cash out refinances deserve more limited protections,” Goddard said. “C.A.R.’s bill will extend these critical protections only to loans that refinance the existing debt as well as additional debt used to improve the property — not for loan amounts used for other consumer expenses.”
C.A.R. has rejected proposed amendments to the bill by the lending industry that would restrict the legislation from applying to loans originated prior to 2011.
“The people that really need protection are the folks who refinanced in 2005 and didn’t know its effect, not the folks who will get loans next year,” Goddard said. “Lenders also tried to limit the legislation so that it applied to only the paid down balance of the loan that was refinanced, which C.A.R. staunchly opposed. That wouldn’t take into account “cash out” loans where the proceeds went to improve the property, and therefore increase the property value.”
View a video of C.A.R.’s Vice President of Government Affairs Alex Creel discussing SB 1178.
Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with nearly 160,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.
