California Realtors Want to Ban Deficiency Judgments

The California Association of Realtors is trying to drum up support for a bill in the state legislature that would ban deficiency judgments on refinancings. Most states place some limit on lenders' ability to go after borrowers if the sale of a home does not satisfy the entire mortgage balance. In California, for example, the lender cannot pursue a deficiency judgment if the loan was taken out to buy the home. But the Golden State does not currently extend that protection to refis. And most defaulted borrowers "have no idea they are personally liable" for the full value of the mortgage even after the bank has repossessed their property, Steve Goddard, the real estate agent group's president, said in a press release issued Tuesday. Of course, the trade group may have ulterior motives for backing the bill sponsored by Sen. Ellen Corbett, a Democrat from San Leandro. After all, the prospect of a deficiency judgment hanging over their heads might deter homeowners from giving up their homes through a short sale or strategic default. And right now, distressed sales make up a sizable chunk of the market. Foreclosure sales alone accounted for 36.4% of California home resales in April (though this figure was down from an all-time high of 56.7% in February 2009), according to MDA DataQuick. The trade group did not return a call seeking comment by press time. Deficiency judgments in residential foreclosures are rare. Most foreclosures in California occur under a deed of trust (not a judicial foreclosure), in which there is no liability for a deficiency, lawyers said. But if that were to change and lenders became more aggressive about collecting leftover debts, deficiency judgments could pose a threat to agents' commissions as well as borrowers' peace of mind.