SB 1178 - Reinstate your anti-deficiency rights!

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.

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