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Deficiency Judgments Outlawed on California Refis

SB 1069 signed by governor

July 10, 2012

By staff

A new law in California prohibits mortgage servicers from collecting deficiency balances on foreclosed refinance loans.

A California law already in place since 1933 prohibited deficiency judgments on mortgages that were used to finance the purchase of a residential property.

But foreclosures on loans that were used to refinance another mortgage weren't protected from deficiency judgments.

That changed, however, on Monday when California Gov. Jerry Brown signed SB 1069.

The legislation, introduced on Feb. 13 by Sen. Ellen M. Corbett (D-San Leandro), was unanimously passed in the state senate and assembly.

The new law, which amends Section 580b of the Code of Civil Procedure, prohibits deficiency judgments on mortgages that were used to refinance purchase-money loans. It also applies to subsequent refinances.

Excluded from the protection are additional cash proceeds from a cashout refinance transaction that weren't "applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the refinance." In this case, any proceeds from a foreclosure sale would first be applied to the principal balance of the purchase-money loan then to the remaining principal balance.

"Many Californians have suffered the heartbreak of home loss since the economy soured, and none should owe more on their homes than the market value," Corbett said in a written statement. "This legislation prevents borrowers from getting caught in an unfair and little known trap simply because they refinanced their homes. It is in the best interests of homeowners and lenders for anti-deficiency judgment laws to be consistent across the board."

Corbett noted that the bill was supported by the California Bankers Association and the California Association of Realtors as well as the Center for Responsible Lending.

Impacted mortgages are those where the original purchase financing closes on or after Jan. 1, 2013, and the security is a one- to four-unit residential property.

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