Mortgage Deficiency Judgments Harder to Obtain

 The Great Recession has generated property foreclosures at rates that could never be imagined. Loan modification is more myth than reality despite Federal efforts to endorse the practice. Many borrowers cannot withstand the underwriting of mortgage loans that should never have been made in the first place.Short sales have emerged as a way to deal with “underwater properties.” A short sale is a transaction in which a lender allows the property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.

Under prior law, a lender who foreclosed on a dwelling of not more than four units, based on a purchase money loan could not obtain a deficiency judgment against the borrower. This protection was lost as soon as the borrower refinanced. A very significant number of borrowers refinanced into the boom times and lost the benefit of the anti-deficiency law.

The new laws (SB 458 and 931) provide that following sale, consented to by the lender, all rights and remedies held by the lender shall be treated as if the dwelling had been sold through foreclosure. The lender can only realize the proceeds of sale; nothing more.

This is a major piece of consumer legislation that broadens the protection available to homeowners. There is no longer a distinction between “purchase money loans” and refinancings. The new laws are designed to make sure that homeowners do not incur a greater liability following a short sale than they would otherwise have after a foreclosure.