Today, the New York Times noted that the California State Legislature is currently considering measures that seek to protect homeowners who go into foreclosure against deficiency judgments. A deficiency is the difference between what the lender receives at the foreclosure sale on a property and the outstanding balance on the mortgage. For example, if borrower has a $300,000 mortgage on his residence and goes into default whereby the lender recovers $250,000 at the foreclosure sale a $50,000 deficiency exists. In many states a lender can file a lawsuit against the borrower and seek to recover that difference. If successful, the lender gets what is called a deficiency judgment.
California law currently protects Sacramento area residents against deficiency judgments on their first deed of trust. This means if you only have a first mortgage then you can simply walk away from your property and you need not worry about personal liability on any difference between the balance owed on your mortgage and what the bank recovers at the foreclosure sale. However, if you have refinanced your property to get a better interest rate or taken out a second loan against the property or the distressed property is your second home, these protections do not apply.
Since many people have re-financed their properties over the last few years these anti-deficiency protections do not apply to many homeowners. This is why SB1178 seeks to extend the protection against deficiency judgments to people who refinanced and took out home equity loans. The catch is that the protections only rise to the level of the original loan amount. This means if a homeowner took out a $300,000 original loan and refinanced for $350,000, taking $50,000 of equity out of the house, the homeowner would be protected for up to $300,000 but would remain liable for the $50,000. So, if that same house sold for $250,000 then the homeowner would potentially owe the bank $50,000 instead of $100,000 if a deficiency was granted.
Legislation like SB1178 show that lawmakers are aware of the problems facing many of Sacramento area homeowners. However, the limits placed on this specific bill also show the legislature must balance those interests of distressed homeowners with the business interests of the Banks and Mortgage companies.
This Bill has passed the state Senate and is currently under review by the Assembly. As a Sacramento Bankruptcy Attorney I review all legislation on matters having a potential impact on my clients. If you or someone you know is having trouble with foreclosure or a lender is seeking a deficiency judgment against you, speak with an informed attorney who may be in a position to help you.