Posts Tagged ‘non-judicial foreclosure’

New Law Exempting More Borrowers From The Threat of Deficiency Judgments Will Have No Effect Today

Under current California law, no borrower is liable for a  deficiency judgment on a purchase money loan. A borrower may be held liable for a deficiency judgment on a refinance, however, but only if the lender chooses to foreclose through the court system in a long and expensive process known as a judicial foreclosure.  Most California foreclosures are non-judicial, and in that case, the lender would never be entitled to a deficiency judgment.

Where the deficiency judgment debate matters is in negotiations for short sales on non-purchase money loans. Currently, lenders can require homeowners to sign an unsecured promissory note for the difference between the sales price of the home and the amount of the note as a condition for accepting the short sale. They use the threat of pursuing a deficiency judgment to coerce homeowners into such agreements. Accordingly, the current rules merely serve as a dis-incentive for short sales as opposed to allowing the lender to foreclose.

Savvy homeowners may call the lenders’ bluff by making them start the foreclosure process. A lender has the choice as to which remedy it may use to recover its money, but it may not choose both. Therefore, if a non-judicial foreclosure has been started, usually by the recording of the Notice of Default, the lender has already made its choice.

A law currently being debated in the California legislature would have ended the threat of deficiency judgments completely. As it stands, if the law does pass, it would only affect borrowers who used refinanced money for home improvements and only on new loans. So, for most homeowners, this new law, if passed, would not change anything.

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