Refinanced mortgages in SF Bay Area likely to get protected from deficiency persuasion.

It is reported that a new legislation in California in the offing, would extend protections for distressed home owners caught under foreclosure – even if they had refinanced the original mortgage. The State Senate approved the new law in June and it was passed by a State Assembly Committee last Tuesday. The final voting is awaited this summer to make it a pronounced law.

Although the exact contents of the proposed legislation are yet to be revealed officially, discussion has already started among Industry circles, about the repercussions of the law, if promulgated in California.

What are the repercussions? Going back in the history, during times of Great Depression, the State Legislature enforced laws so to allow homeowners, who have lost their homes due to mortgage foreclosure, from being pursued by lenders for the “deficiency” that is difference between their former home’s market value and the dues on mortgage.

These protective laws were made at a time, when people were not using refinancing that frequently as now. So they did not include mortgage loans that were refinanced by the home owners – even for obtaining a lower interest rate – into this protection.

Today’s position is once a foreclosure is complete, lenders may use the way of obtaining a deficiency judgment through the Court and pursue the borrowers for the balance amount, even after their forfeiting their home. Although it is a cumbersome procedure to obtain a deficiency judgment, some lending banks use it as leverage for negotiation for loan modifications of the distressed home owners.

There is a growing tendency of people just walking away from their mortgaged homes, without caring for foreclosure and they don’t even care about the damage to their credit record. They can save their future earnings.  Also there is another tendency of so-called strategic defaults – people who can afford but refrain from paying mortgage installments. The proposed legislation will save them all, from the lending bank’s persuasion for deficiency.

The California Association of Realtors has sponsored the proposed legislation and the State Bankers’  groups are trying to alter the bill, saying the existing mortgages should not be altered, and if need be, this can be extended to future mortgages.

More info will be available once the bill becomes a law.

Posted by Amitesh Kumar on Jul 2 2010. Filed under Foreclosures, Housing, Lending. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry