California State Assembly Passes SB 1178; Bill Would Equalize Anti-Deficiency Protections for Homeowners Who Have Refinanced

Under California law, if a homeowner defaults on a mortgage used to purchase a home, the mortgage lender may not sue the homeowner for the lender’s losses; the lender may only foreclose on the property itself.  However, homeowners who have refinanced the original purchase debt (as many homeowners have done over the past five years), lost the anti-recourse protections enjoyed by those who hadn’t refinanced. 

As a result, homeowners who have refinanced have found themselves in a very different position from those who never refinanced if they have run out of money to pay their mortgage.  Homeowners who did refinance and who later must “walk away” from their home could find themselves later declaring bankruptcy if their mortgage lender files a lawsuit against them for the difference between the amount of money loaned and the amount the lender was able to recoup at a foreclosure sale.  At the same time, individuals who didn’t refinance are less likely to declare bankruptcy because the lender cannot sue them for the difference.

Last week, the California State Assembly passed a bill which, if signed, would extend the same non-recourse protections which homeowners enjoy now on their original mortgage(s) to subsequent mortgages obtained after a refinance.

Under SB 1178 (Corbett), if a homeowner refinances and later defaults, they will have the same protections against deficiency judgments as they had with their original loan under state law. This simple but significant change would likely decrease the number of bankruptcy filings for homeowners who didn’t realize the simple act of refinancing could later force them to file bankruptcy after defaulting.

(Photo credit: San Diego Homes blog)

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