Banks Oppose Bill to Protect Borrowers
The California Association of Realtors is sponsoring SB 1178 (Corbett) to extend anti-deficiency protections to homeowners who have refinanced "purchase money" loans and are now facing foreclosure. Most homeowners didn't even know that when they refinanced 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 was two votes short of passage last week and is now being amended to remove the provision about "cash out" refinances. With this amendment the borrower will still be protected on a "purchase money" mortgage when that mortgage is refinanced but not on any cash out. SB 1178 will be now be voted on again on June 3, 2010 in the Senate.
California has protected borrowers from so called "deficiency" liability on their home mortgages since the 1930s, but the evolution of mortgage finance requires the statute to be updated.
Current law says that if a homeowner defaults on a mortgage used to purchase his or her home, 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 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 re-finance the original purchase debt -- even if the re-finance was only to gain a lower interest rate. Recent years of low interest rates have induced tens of thousands of homeowners to re-finance their mortgages, yet almost no one realized that by re-financing their mortgages to obtain a lower rate, they were forfeiting their protections. These borrowers became personally liable for the balance of the loan.
SB 1178 was two votes short of passage last week and is now being amended to remove the provision about "cash out" refinances. With this amendment the borrower will still be protected on a "purchase money" mortgage when that mortgage is refinanced but not on any cash out. SB 1178 will be now be voted on again on June 3, 2010 in the Senate.
California has protected borrowers from so called "deficiency" liability on their home mortgages since the 1930s, but the evolution of mortgage finance requires the statute to be updated.
Current law says that if a homeowner defaults on a mortgage used to purchase his or her home, 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 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 re-finance the original purchase debt -- even if the re-finance was only to gain a lower interest rate. Recent years of low interest rates have induced tens of thousands of homeowners to re-finance their mortgages, yet almost no one realized that by re-financing their mortgages to obtain a lower rate, they were forfeiting their protections. These borrowers became personally liable for the balance of the loan.
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