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Anti-Deficiency Rules and Senate Bill 1178

People often cite to California’s anti-deficiency rules as a consumer’s best friend. See California Code of Civil Procedure 580b. While it is true that precluding a deficiency judgment on any purchase money mortgage pursuant to a foreclosure is a great benefit to California home buyers, the reality of home ownership tends to negate the benefits associated with the anti-deficiency rules.

REFINANCE

Refinancing a home loan has become a very common occurrence. If there is a better interest rate available, why not try and refinance your loan? The reason is because, once the loan is refinanced, the anti-deficiency statutes no longer apply. Accordingly, the lender is then free to seek a deficiency judgment against the borrower after a foreclosure.

Basically, once a borrower’s loan is refinanced from its original purchase money mortgage status, the lender is free to seek repayment in full through foreclosure and subsequent deficiency actions.

This always seemed counterintuitive to the stated purpose of the anti-deficiency rules, and it appears that the California Legislature is finally looking to rectify this inequity.

SB 1178 is currently being reviewed by the California Assembly having been approved by the Senate in June of this year. The bill functions to extend anti-deficiency protection not only to original purchase money mortgages, but to any refinanced purchase money mortgage. Basically, if a borrower refinances an original purchase money mortgage without taking any cash out for home improvements or any other purposes, that loan would remain subject to the anti-deficiency rules.

The policy is sound: as long as the borrower is liable for a loan, the underlying funds of which were used only to purchase the property, no deficiency can be sought, even if such loan was refinanced subsequent to the initial purchase.

While SB 1178 has not become law yet, most anticipate it going into effect on or about July of 2011.