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This is an educational article about the current financial crisis and whether it is wise to "walk away" from your mortgage.
The answer to this question depends to a large part on whether you live in a state that has consumer protection statutes known as "anti - deficiency" statutes. These statutes are designed to protect the homeowner from being responsible for loans secured by their personal residence when the personal residence is "underwater."
An "underwater" personal residence is one in which the principal balance on the loans that are against the property are in excess of the value of the property.
In many states, some form of consumer protection has been enacted by the state legislature which prevents banks from suing homeowners for deficiencies. These laws typically apply to single family owner occupied residences.
In California, for example, the legislature enacted Code of Civil Procedure section 580b which prohibits a deficiency judgment in the strict sense, i.e., a personal judgment against the debtor. In relevant part the code section provides as follows:
"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."
In layman's terms this means that a homeowner who secures a "purchase money" loan (a loan used to purchase their home) cannot be sued by his bank on the loan that is secured by the home.
You will also note that this section only applies to a "dwelling of not more than four families" which in essence means that if you live in and own and duplex, triplex or fourplex, this anti - deficiency statute applies to you.
This type of statute has been adopted in many states across the country. You should check with an attorney in your state to find out the exact language of the statute in your state and whether or not it applies to you.
So if your personal residence is "underwater" in the state like California and it is secured by a "purchase money" loan, you can safely "walk away" from the mortgage and its financial obligation without fear of being sued by your lender.
Does the "anti-deficiency" statue stop deficiency judgments against homeowners that participated in a short sale?
Recently the California Legislature approved Senate Bill 931 (SB 931) amending Code of Civil Procedure CCP §580e to provide for anti-deficiency protection to certain short sales. Short sale sellers have been traditionally faced with the possibility that their lender would seek a deficiency i.e., the difference between the sales price set forth in the short sale and the existing loan balance.
While in many situations the short sale paperwork provided by the bank provides for a waiver of the deficiency, most contain a warning to the seller that the bank was retaining its option to recover the deficiency by an action in court. With the passage of SB 931, which went into effect on January 1, 2011, a short sale borrower that comes within the language of the statute no longer needs to worry that he or she will be sued by the lender for the difference between the loan balance and the sales price received by the lender.
It should be noted, however, that this short sale anti – deficiency protection is afforded only to a loan secured by a first trust deed. Furthermore, it applies only to a single family residence which the statute defines as “a dwelling of not more than four units.” There are certain limitations to this anti – deficiency consumer protection statute. The first and most important limitation is that it does not apply to junior liens. Thus, the holder of a note secured by a second trust deed would still retain the right to sue for the non – payment of the note. Another limitation is that it applies only to human borrowers not corporations.
Interesting, however, there is no requirement that the human borrower be an owner occupant. Finally, this statute does not apply when the borrower commits either fraud. While this statute, on its face, may be a boon to short sales in that it insulates the homeowner from deficiencies in connection with a sale for less than the balance of the loan, there is a potential that this recent enactment will have a chilling effect on short sales because note holders, who can no longer sue for a deficiency, will likely require higher payoffs to offset the potential recovery that they formerly had when deficiencies were possible.
Once you made this determination, that you are in an anti - deficiency state and that the anti - deficiency statutes apply to you, your next decision really is one of personal choice. Do you love the house? Do you think the market will recover? Can you afford your mortgage payments?
It is certainly nice to know that you do have choices. However, be clear not everyone can simply "walk away" from their mortgage. It is best that you seek legal advice from a competent real estate attorney in your state before you make the decision to "walk away."
This is an article by attorney Mitchell Reed Sussman. Mitchell is a California real estate attorney specializing in real estate, foreclosure and bankruptcy. His website is http://www.palmspringslitigationattorney.com.