This material is for discussion purposes and has not been approved by the Transactions and Regulatory, Legislative or Executive Committees or the Board of Directors.
Issue: What position should C.A.R. take on a State Bar proposal to extend “purchase money” anti-deficiency protections to refinances of new purchase money mortgages?
Options: 1. Support 2. Seek amendments to apply the rule to existing loans. 3. Other 4. Do Nothing
Status/Summary: In 2010 C.A.R. sponsored SB 1178 (Corbett) to extend the anti-deficiency protections of purchase money loans to subsequent loans refinancing the same debt. Despite strong opposition from lenders, the bill passed the legislature but was vetoed by Governor Schwarzenegger. C.A.R. sponsored the bill again in 2011 and later revised it to become SB 458, a bill that cut off deficiency liability of short sellers to junior noteholders when a short sale was approved. The State Bar has indicated that it intends to sponsor legislation similar to SB 1178 that is (unlike SB 1178) applicable only to loans made after it becomes law.
Discussion: Historic rules. In the wake of the great depression, California adopted a series of homeowner and borrower protections to protect against lenders taking advantage of borrowers. The protections include a prohibition on deficiency liability for purchase money loans, or any loan in non-judicial foreclosures, requirements for fair value bids in foreclosure, a one-action rule requiring lenders to pursue real estate security instead of borrower personal liability and other procedural requirements.
Recent Changes. In response to the recent economic downturn, California has begun to adopt a new generation of borrower protections, again mostly focused on the foreclosure process. In 2007, SB 1137 (Perata) significantly increased pre-foreclosure notice requirements (and processing times), state regulators require mortgage servicers to have “robust” workout mechanisms in place or face extended pre-foreclosure delays, and two bills (SB 931 (Ducheny); SB 458 (Corbett) have restricted lenders ability to collect on a deficiency after a short sale. At the federal level, new (and pre-emptive) requirements for registration and regulation of mortgage loan originators (MLOs) have been imposed on the states, as has a new scheme of regulation for opinions of value (Appraisals and BPOs). Both are inconsistent with California law to some degree. Finally, both levels of government have attempted to regulate loan modification scams; the primary effect has been to prohibit advance fees and to increase penalties.
SB 458 (Corbett) has precipitated considerable discussion as to whether barring post-short sale recourse by junior lenders will have a substantial negative or positive effect on junior lenders’ inclination to approve short sale applications. Some have suggested that its language regarding the ability of lenders to demand additional contribution by sellers needs to be changed. One suggestion has been that a schedule of payments to increase (or at least clarify) what share of sales proceeds should go to the junior lender ought to be included in the statute. To date, information on performance is only anecdotal and no “tweak” to the bill is anticipated.
What’s Next? It seems clear that much of what can be done (or attempted) regarding foreclosure process has already been done, at least at the state level. With the “low hanging fruit” of reform already taken, lenders have been increasingly successful at defeating attempts to make further changes in foreclosure process. Indeed, they defeated or compromised every attempt to change the law introduced in 2011, including provisions prohibiting “dual track” foreclosure during loan negotiations. Even the C.A.R.-sponsored SB 458 was ultimately a compromise that lenders found it expedient to support.
The remaining areas that are most of interest to REALTORS®, at least at the state level, tend to be in the short sale process itself and the marketing of post-foreclosure properties. Lack of standardization, inconsistent requirements, delays and lost documents may lend themselves better to negotiated private sector solutions than to a legislative one.
Treatment of the outstanding balance of default properties is a remaining area that is attracting increasing attention. However, policy in the area is unsettled. The federal HAMP/HAFA programs include the concept of principal reduction, but reportedly have had little effect to encourage lenders to write down principal balances for “upside down” borrowers. C.A.R. and NAR have also opposed the grant of authority to bankruptcy judges to “cram down” first mortgage principal balances in bankruptcy. Lender groups killed such a proposal last year in congress, arguing that it would increase the cost of mortgages to all.
State Bar Proposal. C.A.R. - Sponsored SB 1178 of 2010 would have extended anti-deficiency protection of purchase money mortgages to refinanced purchase money debt, but was vetoed. While that bill would not have spoken directly to loan modification requirements, but by eliminating recourse on the debt it would have forced a change in the posture of loan modification and short sale negotiations. At the time, C.A.R. rejected a proposed amendment from the bankers to limit the bill’s effect only to new loans made after the effective date of the bill. C.A.R. argued that such an approach denied protection to borrowers with existing loans that had no knowledge that they had lost purchase money protection by a refinance, and because of the economic downturn, these were the borrowers who most needed protection. The State Bar of California is reportedly prepared to introduce legislation to do just what was proposed: protect the refinanced balance of purchase money mortgages just like the original mortgage (i.e., no personal recourse) but only to the extent of unpaid purchase money balance (no coverage for cash-out portions of the refinance) and only for loans made after bill’s effective date.
WHAT POSITION SHOULD C.A.R. TAKE ON THE STATE BAR PROPOSAL?