Realtors in California are sponsoring legislation that would prohibit mortgage lenders in that state from collecting deficiency balances on refinanced loans that have been foreclosed.
The California Association of Realtors announced today its sponsorship of SB 1178.
According to the Los Angeles-based association, legislation already in place since the 1930s has prohibited the collection of deficiency balances if the foreclosed loan was used to purchase the property. But “critical legal protections” are lost by borrowers who refinance their original purchase-money loans, and they could be personally liable for the difference between the foreclosed home’s sales price and the mortgage balance.
The legislation would extend anti-deficiency protection for borrowers who have refinanced their original mortgages but now face foreclosure.
“The people that really need protection are the folks who refinanced in 2005 and didn’t know its effect, not the folks who will get loans next year,” the announcement said.
Despite lenders’ efforts to exclude the cashout portion of refinanced mortgages, C.A.R. “staunchly” and successfully opposed such a measure. The group said that the lenders’ position didn’t factor in cashout loans where the proceeds were used to improve the property.
C.A.R. said, “Current events demonstrate there has been no shortage of inadequate underwriting by mortgage lenders, the banking industry and others preying on unsuspecting and uninformed consumers.”
The group warned that letting lenders consider borrowers’ other assets in their lending decisions “erodes their incentive to make certain that the loan ‘pencils out’ and has adequate security.”
