During The Great Depression, California legislators made the decision that losing your house was enough punishment.  They did not want lenders nagging borrowers for the difference in what the former owner owed and what the house was worth, an amount called the deficiency.  Thus, in California there can be no deficiency judgment on purchase money loans dating back to the 1930’s.

As the market heated up in the mid 2000’s, homeowners used their homes as pig banks for vacations, college tuition, cars, boats, and just about anything you can imagine.  Many of the homeowners ended up struggling after the crash and are losing their homes to foreclosure and are facing deficient judgments.  If a homeowner refinanced to get a lower interest rate or to get cash out, the loan is no longer a purchase money loan and is subject to a deficient judgment.

A new bill introduced by the real estate lobby has passed the California Senate which would give some relief to foreclosed homeowners.  The Senate bill will not allow a deficiency on a refinanced loan up to the amount that was paid for house, a substantial change from the current law.  For instance, if a homeowner refinanced a home which was purchased for $500,000 and the new loan was for $600,000, the deficiency judgment could only be applied to the $100,000.  If that $100,000 was used to make improvements to the house, the amount spent on the home improvements would also be exempt from a deficiency judgment.

Much lobbying by real estate agents and Banking groups have changed the original bill which now must pass the California legislator.  Expect more lobbying, for instance bankers do not want the bill to be retroactive as passed by the Senate.  Bankers want the new law to apply to only new loans.

The argument from real estate agents say those who lost their houses should not be burdened by debt so they can move on and hopefully buy consumer goods and homes in the future.  Bankers on the other hand, believe borrowers should be liable for what they owe.

In reality, according to The New York Times, this is a fight over something that is not happening, at least yet.  Lenders in California rarely chase foreclosed borrowers for deficiency judgments.  Pursuing such cases is an arduous process and few of those in foreclosure have assets or income to make it worthwhile.

  The California Senate will take this bill to a committee the week of June 28.

Some more significant changes are in the works this summer concerning FHA loans.  Currently FHA allows seller’s concessions to the buyer of 6% of the selling price, but not for long.  A rule change expected this summer will allow a 3% seller’s concessions.  The logic to this change seems simple.  If the buyer is putting down the minimum down payment of 3.5% and they receive a 6% seller’s concession, the FHA is considering the buyer to be under water from the first day of ownership.  The FHA also believes the 6% incentive encourages inflated appraisals to cover the cost of the concessions.

Whatever you may think of the existing seller concession rules, the fact remains:  Concessions of 6% will be allowed until the FHA announces otherwise. Buyers and sellers who need the 6% concessions  to conclude a transaction need to know the time is ticking, thus creating a motive to purchase now especially  to a  buyer or a seller entertaining offers with  a minimum 3.5% FHA loan.

  Please give me a call at 760-831-5996 if you are contemplating using FHA for a purchase for a sale.  I know FHA.