Welcome back to the Divided States of America.
Oppenheim Law has been discussing the chasm that exists in our country between recourse and non-recourse states for years. (Check out Roy Oppenheim’s Op Ed piece in the Sun-Sentinel) It now appears that rift is widening.
In non-recourse states, like California, a lender may not pursue a deficiency following a foreclosure sale for loans that qualify as “Purchase Money Mortgages.” For a loan to qualify as a purchase money mortgage in California, the loan must be obtained at the time of purchase of the borrower’s principal residence. This can also include a second mortgage obtained at the time of purchase. Lien holders of purchase money mortgages are also unable to receive a deficiency judgement against a California homeowner who executes a short sale.
And earlier this month California passed legislation giving even more protection to underwater homeowners. California Senate Bill 458 now provides that even junior lien holders, meaning mortgages not obtained at the time of purchase, no longer have any deficiency rights against the borrower after a short sale.
Recourse states like Florida provide no such protections to underwater homeowners. Banks are able to pursue deficiency judgments against Florida borrowers who are foreclosed on, or even Florida homeowners who execute a short sale. A key aspect of Oppenheim Law’s Florida real estate practice is defending homeowners from deficiency judgments by negotiating with banks during the foreclosure and short sale processes.
Proponents of Cal. Senate Bill 458 argue the legislation brings more certainty to the short sale process and is a valuable protection of homeowners’ rights. They argue that by removing the possibility of a deficiency judgement from the negotiating process, short sales will be executed more quickly and efficiently, helping repair the real estate market.
All of these ideals probably sound fantastic to an underwater homeowner, but this bill has a potential unintended consequence. Junior lien holders in California might end up being less likely to approve a short sale now that they cannot pursue a deficiency judgement.
Currently, only purchase money mortgages used to buy your primary home are non-recourse following a foreclosure sale in California. Mortgages obtained after the purchase of the home are still vulnerable to deficiency judgments against borrowers who are foreclosed on following judicial foreclosure proceedings. The mortgagees who hold liens acquired after the purchase of a home could decide to deny short sales, which usually only pay them a small percentage of the remaining loan balance, and instead force homeowners into foreclosure where deficiencies are still allowed.
If junior lien holders start denying short sales, foreclosures could skyrocket in California. What was intended as a protection for underwater homeowners has the potential of making them worse off than ever before.
In Florida, homeowners still have the ability of negotiating greatly reduced deficiencies, and in many cases homeowners are able to have deficiencies waived all together.
Only time will tell which side of the Divided States of America is managing this housing crisis best.
