California Gov. Arnold Schwarzenegger has signed into law a bill that protects homeowners who get their lender’s approval for a short sale from deficiency judgments, but vetoed related legislation that would have extended similar protections to homeowners who have refinanced their mortgage.
SB 931 was supported by the California Association of Realtors, although the group said the bill did not go far enough because it does not protect homeowners engaging in short sales from attempts by junior lien holders — owners of notes associated with so-called "piggyback loans" — from seeking a deficiency judgment.
Depending on laws that vary from state to state, lenders may file for deficiency judgments when the proceeds from a short sale or foreclosure sale don’t cover the entire amount they are owed.
California generally prohibits lenders who foreclose on homeowners who default on a purchase mortgage from pursuing deficiency judgments. But homeowners who have refinanced their homes or taken out second loans may find themselves facing such claims.
Gov. Schwarzenegger, in dealing with a slew of bills from the Legislature, vetoed a bill sponsored by CAR that would have expanded protections against deficiency judgments to consumers who have refinanced their mortgages, but only up to the amount of their original loan.
In a veto message, the governor said SB 1178 "would fundamentally alter and impair the nature of pre-existing, previously negotiated mortgage loan contracts" and encourage borrowers to strategically default on loans they have the ability to repay.