Justabroker mentioned SB 1178, backed by the C.A.R. Here’s their pitch on why the non-recourse law should apply to refinances:
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.
C.A.R. is Sponsoring SB 1178 Because:
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 re-finance. Homeowners didn’t know that their re-finance 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.
SB 1178 is consistent with the intent of the orginal law and simply updates it for modern times. Current law was intended to ensure that if someone lost their home to foreclosure, they wouldn’t be liable for additional payment. Since the law was passed over 70 years ago, homeowners re-financing from the original loan to lower their interest rate has become commonplace. The 1930s legislature didn’t anticipate how mortgages would change over time.
Lenders could pursue families to collect this “deficiency” debt years down the road. Under current law, lenders have up 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” re-finances, unless the money was used to improve the home and it doesn’t apply to HELOCs.
The C.A.R. video (1:39 min):
http://videos.car.org/mediavault.html?menuID=3&flvID=8
“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.”
How is that fair to “…someone that has purchased a note from a lender…” who was purchasing it based upon the laws/rules in place when they purchased the note?
I know I would certainly value a note at a lower price if recourse was not allowed.
Hence, rates would need be higher to compensate for the added risk.
Nice work gov, if higher rates are your goal.
Secondly, “…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.”
Why does no one ever crack down on those who didn’t BORROW responsibly in the first place?
Off the soapbox…for now.
Clearfund, while I agree with you that the terms of the documents as signed should be enforced, I actually think this will have no effect on re-fi rates because the current rates essentially provide a risk premium when there is no risk. Further, there is something odious about banks marketing loans like 5/1 ARMS that must be re-fi’d to be affordable and the homeowner loses the protection.
And, if rates do go up, then maybe people will return to traditional loans and stick with them until they are paid off. I have a 30 year fixed, boring. I intend to pay it off (probably before the 30 years pass) and be done with it.
Sheeeeesh… How many more incentives can we give to home owners? Why not incentivize people to invent cars that don’t run on gasoline or teachers to improve literacy?
home owner gifts:
(1) interest is tax deductible
(2) capital gains are tax free (up to $250k/person)
(3) generous cash tax credits to buy, both state and federal
(4) not responsible for more than the down payment
(5) Whenever rates go down, they refinance and lower their payment. Whenever rates go up… they feel no effect.
(6) Property taxes are locked in
If it were not for all the refi and heloc second liens, this would for the most part be a non-issue.
If all you have is a refinanced conventional first, there is little possibility that there would be an actionable deficiency. Once a foreclosure occurs the usual way, non-judicial foreclosure with a trustee, there is no deficiency permitted under California law.
Yes, it is theoretically possible that a lender will go the long expensive route and foreclose judicially in order to preserve a deficiency, but you just don’t see that happening, for good reason. Reasons why include that the process takes a year or two through the court system and the owner retains a one year right of redemption which means that they cannon be evicted from the premesis for a year after the foreclosure is completed, and title is not really insurable during that time.
So really, this CAR bill appears to be all about refi and non-purchase money heloc second liens, which generally retain recourse after a first lien finishes foreclosure. Borrowers with refi firsts get the same protection as purchase money loans when a lender completes a non-judicial foreclosure. Either that, or CAR is just tilting at windmills.
If all you have is a refinanced conventional first
You probably still have equity!
Maybe this is a conspiracy by CAR to give a reason for serial refinanciers to stay in their house, instead of short selling – which would be doing realtors a favor!
Realtors are their own worst enemy though.
I had one today where we offered $750,000 on a short-sale house listed on the range 799-850, and on market since Jan 2009.
The agent declined it. He said that it has to be in the range, even though no package has been sent to lender.
‘B 1178 does NOT apply to “cash-out” re-finances, unless the money was used to improve the home and it doesn’t apply to HELOCs.’
Which means it does. It’s called “Catch me if you can”.
In any case, non-recourse is simply dumb in itself. People in other states have no trouble being responsible for themselves, so the argument fails even by its own reasoning.
I don’t have a problem with this, provided it’s non-retroactive. That is, only loans refinanced after the day of passage become non-recourse. When the banks offered to make a loan, they assumed it was recourse, which lowered their risk, which lowered their costs, which means they could offer a lower interest rate than otherwise. It’s unfair to change the terms of an existing contract like that if it includes existing loans.
“The agent declined it. He said that it has to be in the range, even though no package has been sent to lender.”
‘Dumb’ just isn’t a strong enough word….
i feel like i’ve joined a bookclub. so…many…words.
you people are smart.
Doesn’t the agent have an obligation to present all offers to his client? Is this different because its a short sale?
Geotpf,
I think what you’re essentially saying is, it doesn’t matter what the rules of the game are, just as long as they don’t change while someone’s playing. I completely agree.
However, we’re the country of calvinball enthusiasts. Look around and see how much we change the rules right when they should be kicking in.
Chuck
Kingside brought up redemption rights.
I’m wondering if it is legal in CA to sell redemption rights so that a third party can rent the place out in the time remaining. I do know that some states allow this.
Side note: I’m not curious about anyone’s ethical opinions about this. 🙂
#2: “I actually think this will have no effect on re-fi rates because the current rates essentially provide a risk premium when there is no risk”
Can you explain your response? I don’t understand how there is no risk? If you remove the recourse component then my instinct tells me you’ve have removed one source of repayment which increases my risk….thus I’d pay less for the loan and conversely demand a higher interest rate.
Seems like there has been proven to be a ton of risk in the business of lending.
A 10-count indictment has been unsealed in San Diego charging six individuals with wire fraud and conspiracy to commit wire fraud, U.S. Attorney Karen P. Hewitt announced Thursday.
The defendants are charged with submitting false and fraudulent mortgage loan applications and related documents to banks and other lending institutions, thereby inducing the institutions to make approximately 36 loans totaling approximately $20.8 million.
The defendants charged with participating in the conspiracy are: Brian Andrew La Porte; Daniel John Schuetz; Michael Wayne Wickware; Roxanne Yvette Hempstead; Darryl Anthony Wallace, aka Darryl Anthony White; and Terrence Smith, aka Terry Lee Smith.
The indictment alleges that the defendants devised a scheme to defraud mortgage lenders and to obtain money and property by false and fraudulent means and diverted the proceeds for their personal use and benefit.
A husband and wife who took part in a foreclosure-rescue scam in San Diego were placed on probation for three years Thursday and ordered to surrender their real estate licenses.
Benjamin and Gloria Hebron pleaded guilty last month to felony charges including rent skimming and deceitful practices by a foreclosure consultant.
As outlined in the plea agreement, San Diego Superior Court Judge Kathleen Lewis ordered the couple to complete 25 days of public work service and pay $8,400 restitution to the victims. If the Hebrons violate the terms of probation, they could each be ordered to serve a year in county jail.
Prosecutors contend that the Hebrons and two other men, one of them a felon, persuaded 22 people to sign over 34 houses to fraudulent trusts. The victims, many of them Filipinos living in the South Bay, believed doing so could save their homes from foreclosure.
Deputy District Attorney William La Fond told the judge Thursday that the Hebrons were lucky they weren’t being sent to jail, but he said this was a fair resolution of the case.
Their business associate, Joseph Encarnacion, wasn’t so lucky. He pleaded guilty last month to two counts of securities fraud and was sentenced to a four-year prison term.
Edmundo Rubi, who prosecutors contend was the mastermind of the scam, has a mental-competency hearing scheduled for July 9 to determine how his case will proceed. In a separate matter, he pleaded guilty in 2005 to operating a pyramid scheme that swindled $24 million from 425 victims, mostly South Bay Filipinos.
“SB 1178 does NOT apply to “cash-out” re-finances, unless the money was used to improve the home and it doesn’t apply to HELOCs. ”
what if you just rolled in the closing costs, or used your existing HELOC for home improvements?
I can’t speak for anyone else, but I have always assumed that any time I took out a loan for anything that I would have to pay back everything I borrowed. So recourse or non-recourse makes no difference in my decision whether or not to borrow money.
I would probably look with more favor on a bill to remove non-recourse protections from original purchase mortgages and require all defaulters to file for bankruptcy to get their creditors off their backs.
Why any consumer wouldn’t want this protection is amazing to me. I read the comments of the folks who are not in that situation and I find it disgusting. If it was you, you’d pray for this passage. It’s a nightmare losing your home, but to be sued after that to get to the rest of your assets is horrible. I know. I was also responsible, but circumstances change. I applaud the bill and hope it passes. I also hope none of you have to endure what I’ve had to.