SB 1178, the bill passed by the Cailfornia State Senate by a 30-4 vote, is on its way to the Assembly.
This bill preserves a borrowers protection from a deficiency judgment when loans are refinanced, but only to the extent that the refinance is used to pay debt incurred to purchase the real property. The provisions of this bill become operative on June 1, 2011.
Yes, there was an amendment slipped in last week that eliminated the cash-out refinances, even those used for home improvement. The current bill is only applies to those who refinanced the mortgage used to purchase the home.
Will there be borrowers who will wait until June 1, 2011 to default on their rate-and term refinance, just so there’s no recourse? It sounds more like the tax credits, it’ll be extra cheese for those who happen to default beginning in 3Q11.
“The current bill is only applies to those who refinanced the mortgage used to purchase the home.”
The way it reads to me, “only to the extent that the refinance is used to pay debt incurred to purchase the real property” means that the portion of the refi that pays off the original purchase mortgage is excluded but not any excess; IOW, if someone has a $300k loan, takes a $350k cashout and defaults, $300k is non-recourse and the additional $50k taken is recourse.
Thanks Jim. Interesting info for those thinking of buying 2nd and 3rds at a discount then trying to collect. You may get a pig in a poke if used to refi the underlying purchase $ loan.
Yeah Gene you’re probably right.
A year from now I don’t think it’ll matter much, unless I’m reading that wrong too.
It doesn’t mean that collectors can get everything they can up until June 1, 2011, does it?
I think the intent is for those who default after 6/1/11, and not sure why they would wait so long before making it “operative”.
Jerry? Kingside? What say you?
Well, until a final version is signed by the governator, it does not become law. I am not sure where the bill is on the assembly side, but the most recent version I am aware of on the senate side is as of June 3:
http://www.aroundthecapitol.com/billtrack/text.html?bvid=20090SB117896AMD
Here is the actual language they are proposing to CCP Section 580b, the current anti-deficiency law for 1-4 unit owner-occupied purchase money loan:
“For purposes of this section, a loan used to pay all or part of
the purchase price of real property or an estate for years shall
include subsequent loans, mortgages, or deeds of trust that refinance
or modify the original loan, but only to the extent that the
subsequent loan was used to pay debt incurred to purchase the real property.
SEC. 2. This act shall become operative on June 1, 2011, and shall
apply only to actions filed after its operative date.”
To me, this is a lot of energy over nothing since the real problem deficiency refi seconds and Helocs are not covered by the new proposed law, and those are the ones that will sue after a first forecloses them out.
When a first forecloses non-judicially, there is no deficiency anyway under CCP 580d, so I just don’t understand what all the Hoopla is about. Maybe CAR thinks it will help with short sales, I dunno.
A lender can still come after you for a deficiency of a non-recourse loan using the short sale route, right? My understanding was the that non-recourse / recourse designations only matter if you go through foreclosure.
Counterpoint:
Doesn’t this change the risk of these loans, after the fact?
Does this not continue to cause confusion in the debt markets?
How can anyone underwrite anything if the rules keep changing?
My guess is that the primary beneficiaries of this are lenders trying to sell refi loans to people they consider good risks who might now be reluctant to refi for fear of losing the non-recourse status of their existing loans in the event of job loss, catastrophic illness, etc. Most of the people these lenders want to sell to probably don’t have cash-out seconds anyway.
I think this will actually greatly increase the incentive for a whole new group of people to walk away from their mortgages, unless I am not interpreting this properly (which is very likely since I am not in the real estate business).
I am not planning on walking away from my mortgage, but I think this would make it much more feasible for someone in my situation. Here is my situation:
Bought house in 2004 with a First (5 Yr. ARM) and a second (HELOC). Within the first year, we were able to use the increase in value to refinance into one 30 yr. fixed morgage with a new lender. As a result, I believe this now makes our mortgage recourse and therefore if we walked away from our (now underwater) mortgage, the lender could come after us. But under the new law, couldn’t we now walk away without worry of the lender coming after us? Not sure if I am interpreting this correctly, but it seems like this could further kill prices as a whole new group of people could walk away from their mortgages. No?