Recession Amendments to California’s Anti-Deficiency Laws

During the recent recession, California’s legislature has amended the real estate anti-deficiency laws in the Code of Civil Procedure in three important ways:

No Deficiency Judgment for Approved Short Sales: SB 931 added subsection “e” to CCP Section 580, which prohibited any first lender who approved a short sale from obtaining a deficiency judgment against the seller.  Subsequently, the enactment of SB 458 provided that any home mortgage lenders who approved short sale transactions, which closed escrow, thereby released the borrower from any deficiency, for senior and junior trust deeds, purchase money and recourse loans, owner occupied homes, second homes, vacant homes, and investor properties with one to four residential units; and, further, lenders could no longer require sellers to contribute money as a condition for short sale approval.

Purchase Money Loan Protection Extended to Refinance Loans: Prior to January 2013, California law protected borrowers from personal liability at foreclosure for the difference between the principal balance and what a lender receives if the loan was a purchase money loan secured by an owner occupied property with one to four residential units. SB 1069 extended this anti-deficiency protection to include any loan used to refinance the purchase money loan, plus any loan fees, costs and related expenses for the refinance. This anti-deficiency protection does not extend to any cash-out refinance when the lender advances new principal.

No Collection Actions Against the Borrower: Even though lenders could not obtain a deficiency judgment for a purchase money loan under CCP 580b, some lenders made it a practice to report these debts as delinquent on the debtor’s credit reports, and to seek payment on the deficiency from the borrower, or they would sell the debt to a third party who then pursued collection. SB 426 amended CCP 580b and 580d to add that no deficiency “shall be owed or collected” under the circumstances covered by the above statutes. The legislature subsequently clarified the statute does not affect the liability a guarantor might otherwise have with respect to the deficiency, or that might otherwise be satisfied from other collateral pledged to secure the obligation.