If you finance the purchase of a 1 to 4 unit owner occupied property, the California anti-deficiency statute set forth in Code of Civil Procedure § 580b prevents the lender from seeking a deficiency against you after a foreclosure sale. (This type of loan is commonly referred to as a “purchase money loan.”) However, a question recently arose whether the anti-deficiency statute protects a borrower from a deficiency if the terms of the original purchase money loan are renegotiated years after the loan was made. The Court of Appeal answered that the anti-deficiency statute still applies and protected the borrower from a deficiency. Weinstein v. Rocha (2012) 208 Cal.App.4th 92.
In Weinstein, the buyer purchased residential property with a loan from a bank secured by a 1st trust deed and a sec- ond loan from the seller secured by a 2nd trust deed. After the purchase, buyer discovered some permit issues and sued the seller for non-disclosure. The buyer and seller settled with seller agreeing to, among other things, reduce the amount of the principal owed on the loan. The settlement was reduced to writing approximately 3 years after the transaction. Ultimately the buyer defaulted on both loans, which led to the bank foreclosing on the property and leaving no proceeds or security for the seller. The seller sought to collect on the deficiency pursuant to the terms of the settlement agreement reached during the lawsuit. The Court of Appeal ruled that the anti-deficiency statute still applied because the settlement agreement did not create a new loan but only modified the terms of the original loan. The crucial factor for the Court of Appeal was that the settlement agreement expressly stated that the new agreement was merely a modification of the earlier loan.
Under the Weinstein ruling, one can make a creative argument that some refinances, such as a refinance to reduce an interest rate (no cash out) with the same lender, should come under the protection of the anti-deficiency statute because it merely modifies the terms of the original loan. However, such an argument will likely not be needed as the California legislature recently passed SB 1069 which will amend Code of Civil Procedure § 580b to apply to “no cash out” refinances. The new law states, “No deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction (collectively, a “credit transaction”) which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except to the extent that in a credit transaction, the lender or creditor advances new principal (hereafter “new advance”) which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction.”
The spirit of the anti-deficiency statute has been to protect a homeowner from personal liability on a purchase money loan. However, the new law recognizes that homeowners regularly refinance and that in doing so they lose this valuable protection against personal liability. In some circumstances a refinance is similar to a renegotiation of the original purchase money loan as occurred in Weinstein. The new law will protect a homeowner from any personal liability on a purchase money loan that is subsequently refinanced. The protections will not extend to a “new advance” or what is commonly referred to as a cash out refinance. The good thing for consumers is that the law is not “all or nothing”, so if you refinance and receive a “new advance,” the anti-deficiency statute will still pro- tect your refinance to the extent it covered your purchase money loan, but it will not protect you from a judgment based on the “new advance.”
We do not know whether the Court of Appeal’s decision in Weinstein was influenced by the passage of SB 1069. However, both the Weinstein decision and SB 1069 do an excellent job of furthering the principle that borrowers should not be personally liable for purchase money loans. There is no reason why purchase money loans should suddenly lose their protections simply because they are later modified through a refinance or other similar transaction.
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