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Land Use/Municipal Law/ Real Estate

Walking Away When Your House is Underwater

In this blog, I’ll provide a simple explanation of California’s mortgage and anti-deficiency laws which allow individuals to walk away from their homes. In addition, I will touch on some of the issues that borrowers need to be aware of in making any sort of financial decision concerning their mortgage.

We’ve all heard that individuals and families today are “walking away from their mortgages” when their house is “underwater,” but many don’t know what this means. A house is “underwater” when its fair market value is less than the outstanding mortgage. Many individuals who are in this position see their mortgage payments producing no equity and feel it is imprudent to keep throwing good money after bad. Thus the question becomes, “Can I get out of this mess?” In answering this question a borrower must consider two primary considerations: 1) Is the lender foreclosing judicially or by trustee’s sale; and 2) is the loan a purchase money deed of trust?

Is the lender foreclosing judicially or by trustee’s sale?
California law allows lenders to foreclose on properties judicially (i.e. by filing a complaint with the court) or by power of sale (otherwise known as a trustee’s sale). The vast majority of foreclosures performed in California are by trustee’s sale. California law allows lenders who judicially foreclose on property the ability to seek a “deficiency” judgment, which is the amount of the outstanding mortgage less the fair value of the property. For example, if the outstanding mortgage is $350,000 and the fair market value of the property is currently $225,000, the deficiency judgment would be $125,000. If the lender forecloses judicially, the borrower is allowed to remain in possession and possibly redeem (“buy-back”) the property for up to one year after the foreclosure sale for the price the lender received at the foreclosure sale.

If, on the other hand the lender forecloses by trustee’s sale, California law statutorily prohibits the lender from seeking a deficiency judgment. However, under this foreclosure procedure, the borrower is likewise prohibited from redeeming the property or possession of the property. As you can see, the statutes work a “give and take” with lenders and borrowers.

Is the loan a purchase money deed of trust?
There are generally two kinds of purchase money deeds of trust which are subject to anti-deficiency laws. In the first, a note and deed of trust is executed by a buyer and payable to the seller for the purchase price of the home. This is generally known as “seller financing.” In the second, a note and deed of trust is given by a buyer to a third party lender (a bank) for part of the purchase price of an owner-occupied residential property containing four or fewer units. This is the more commonly understood method of financing.

Under California law, these two methods of financing prohibit the lender or seller from seeking a deficiency judgment. However, purchase money anti-deficiency protections could be lost if the loan is not a “standard” transaction, such as a construction loan or in some cases of refinancing.

How do these protections relate to people walking away from their homes?
Banks are generally unable to obtain deficiency judgments from foreclosures who walk away from their homes because the loans made were for purchase money. Because the bank cannot seek a deficiency, there is no reason for them to go through the more cumbersome process of judicial foreclosure. These individuals may walk away knowing that their lender can’t go after them for anything more than the property itself.

However, walking away will impact the borrower’s credit since the bank will eventually foreclose on the property. In addition, individuals need to be aware that these actions could trigger “cancellation of debt” income, which could mean that they would need to pay income taxes on the amount of debt that has been forgiven. Forgiveness of non-recourse debt is not subject to cancellation of debt income and the 2007 Mortgage Forgiveness Relief Act provides taxpayers with additional protections for up to $2 million dollars (expires in 2012). It is a good idea for homeowners to know exactly what kind of debt their mortgage represents before making any decision.

Before deciding to walk away, homeowners need to be aware of their options and understand their ramifications. We encourage all individuals who face any sort of mortgage difficulties to seek the assistance of an attorney who is experienced in the real estate field. By being informed, individuals can make their own path through the mess instead of allowing the path to make itself.

Jon Ansolabehere

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Use Permits Allow Flexibility in Zoning

Zoning is the separation of a municipality into districts and the application of different regulations in each particular district. Zoning regulations are generally divided into three types: those that divide a municipality into various land use designations; those that list the permitted uses within those designations; and those that regulate development standards.

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The Difference Between a Charter City and a General Law City

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The Business of Your Local Government Agency is Your Business – a Primer on the Brown Act (Part 2)

In Part 1 of this primer on the Ralph M. Brown Act (“Brown Act”), the laws requiring meetings of elected or appointed members of a public entity be open to the public were discussed. The legislative intent and state policy that public agencies exist to aid in the conduct of the people’s business was cited.

Part 2 will discuss the notice and agenda requirements of the Brown Act.

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Municipal Attorneys and Religious Topics

    I’m always struck by the amazingly wide range of issues that municipal attorneys get to deal with.  It’s what keeps the practice continually fresh and interesting.  This was brought to mind recently when the U.S. Supreme Court issued a ruling in late April regarding a cross on Federal land on the Mojave National Preserve.  The cross had been put in place in 1934 by members of the Veterans of Foreign Wars (VFW), to honor American soldiers who had died in World War I.   The ACLU had brought suit on behalf of the Plaintiff, Frank Bruno, claiming that using a religious symbol as a national war monument was offensive and violated the separation of church and state.  The lower courts, up through the 9th Circuit Court of Appeals had agreed, ordering the removal of the cross.  In a narrow 5-4 ruling in the case, Salazar v Bruno,  ( a greatly divided U.S. Supreme Court sent the case back to the lower court, saying it used the wrong standard.  In the lead opinion in the case Justice Kennedy stated that “The goal of avoiding governmental endorsement does not require eradication of all religious symbols in the public realm…” 

    I’ve taken an interest in cases involving crosses because years ago I was attorney for a city that had a cross issue.  In Lompoc, there is a large cross that is prominently displayed on a hill in the City.  It had been constructed in 1912 to commemorate the 125th anniversary of the founding of the La Purisima Mission and the 100th anniversary of its destruction by an earthquake.  It had always been assumed that it was on City owned property.  One day I received a letter from a local atheist group demanding that the City take it down.  After some research we concluded it was on land owned by a local contractor whose family had been in town since the late 1800s.  I wrote a letter to the atheist group, telling them it wasn’t on our property, and adding something to the effect “by the way, did you know about the wonderful history associated with the cross…”  That did the trick and the issue went away.

    Other crosses in California, however, have been the source of great controversy.  In the San Diego area there is the infamous case of the Mt. Soledad cross.  It would take pages to detail the legal battles over that cross, which has been the subject of over 20 years of litigation, and includes maneuvering to save the cross by selling it to a private group (a move struck down by the 9th Circuit Court of Appeals), designation under federal law as a national veteran’s memorial, and two ballot measures.   The latest 9th Circuit case was argued just this last December and recent articles have speculated that the new Supreme Court ruling will make a difference in the newest pending Mt. Soledad case. 

    Several years ago the City of Ventura was also embroiled in controversy over a cross.  That cross was located in a City park and the controversy that erupted was defused by the City selling the cross and an acre of land surrounding it to the highest bidder, which turned out to be a local group, San Buenaventura Heritage, Inc, which now maintains the cross.  No litigation was ever brought, but it was threatened, which is what led to the sale of the land.

    Of course, cross issues are just one small category of the type of religious topics that can confront a municipal attorney.  For example, issues involving invocations at the start of meetings and religious displays in parks during holidays are not unusual and can be tricky and controversial. 

    As the narrow ruling in the recent Supreme Court case suggests, as well as the more than 20 year history of litigation in the Mt. Soledad cross case, the law in these matters is usually not as clear or easy as the public agency’s attorney might like.  At the same time, it’s being able to deal with fascinating issues with constitutional dimensions like these that let me tell folks that it’s never boring when you’re a municipal attorney…

David H. Hirsch

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For those folks who follow mobile home rent control an important development occurred last week in what seems to be the never ending battle by park owners over the issue of “vacancy control”.  In a case out of the City of Goleta, the 9th Circuit Court of Appeals has granted what is called “en banc” review for a case that was decided in September, 2009.

First, a bit of background for those of you who aren’t rent control aficionados.  Vacancy control is the idea that when a controlled unit changes hands the rent stays under rent control and isn’t allowed to increase.  For years, owners of mobile home parks have raised a variety of arguments based on the assumption that rent control keeps rents artificially low and that vacancy control is a “taking” under the 5th Amendment of the U.S. Constitution.   The idea is that by not allowing rents to rise to what park owners argue is the “market rate”, vacancy control creates a “premium” value that transfers from the park owner to the owners of the mobile home, since the mobile homes are more valuable as a result of rent control.

This argument has been the subject of a series of federal court lawsuits since the late 1980s.  One case, Yee v Escondido, even made it all the way to the U.S. Supreme Court in 1992 on the theory that vacancy control constituted a “physical occupation” taking.  Ultimately, the Supreme Court unanimously disagreed (  After Yee, another line of cases was initially successful under a different taking theory in the case Cashman v. City of Cotati ( ).   It was ultimately undone, however, by another Supreme Court case that changed the underlying taking theory that the park owners relied on (see  The result was that the 9th Circuit reversed an earlier ruling in favor the park owners and ruled in favor of the City of Cotati.

Mobile home park owners, however, are not folks who give up easily and they have continued their assault on the constitutionality of vacancy control.  Once again they have achieved what may be just an interim success.  Last September in the case of Guggenheim v. City of Goleta, another panel of the 9th Circuit Court of Appeals bought the argument that vacancy control transfers a “premium” from the park owner to the owner of the rent controlled mobile home, and that it constitutes a taking.  Here’s a link to the decision, but be forewarned you need to allow a long time to read it because it’s 75 pages long!

Last week, in a hopeful sign for folks disturbed by the ruling and its implications for the over 100 California cities and counties that have mobile home rent control, the 9th Circuit granted “en banc” review.   This means that a larger panel of 11 judges will now review the case.  So, stay tuned as the newest round of litigation over whether vacancy control is a “taking” plays out.  I’ll continue to report on this issue as information becomes available.


David H. Hirsch

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