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.