The following article was circulated via email today by the California Association of Realtors:
On Thursday, Governor Schwarzenegger vetoed SB 1178 (Corbett), C.A.R.'s sponsored bill that would have expanded anti-deficiency protections. In his veto message, the Governor made clear his view that the bill interferes with an existing contract. Governor Schwarzenegger vetoed the legislation for that reason, commenting that "this bill fundamentally alters the nature and impairs the value of previously negotiated contracts, leading to negative consequences for the value of those loans held in a lender's portfolio and a deleterious impact on the secondary market." The veto message also commented that "the bill would encourage borrowers to strategically default on loans they have the capacity to repay simply because the mortgaged properties have lost value."
C.A.R. sponsored SB 1178 to better protect homeowners going through foreclosure. SB 1178 would have ensured that homeowners keep the same "anti-deficiency" protections they have in the original loan after the loan has been refinanced.
California's anti-deficiency protection for "purchase money" mortgages says that if a homeowner defaults on a mortgage used to purchase his or her home, the homeowner's liability on the mortgage is limited to the property itself. The law has worked well since the 1930s to protect borrowers, ensure the quality of loan underwriting and allow borrowers brought down by financial crisis to get back on their feet.
Unfortunately, the 1930s law hasn't kept up with current times. Current law doesn't apply to loans used to refinance the original purchase debt, even if the refinance was only to gain a lower interest rate. Recent years of low interest rates have induced tens of thousands of homeowners to refinance their mortgages. During those years, almost no one realized that refinancing their mortgage to obtain a lower rate, they were forfeiting their protections and were becoming personally liable on the new note.
SB 1178 would have corrected this injustice by extending anti-deficiency protections to those who have refinanced their loans.
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