How big is a loophole? That depends on one’s perspective. In the case of homeowners dealing with distressed properties and those caring banks that refuse to remove their deficiency judgment wording from their agreement in the case of a short sale (or who ask and arm, leg and thigh to do so) the loophole remains enormous. This loophole allows distressed homeowners to be sued by their lender for the difference between the value of the foreclosed or short sold property and the outstanding balance on the mortgage loan.
Currently, if a homeowner defaults on a mortgage used to purchase their home, the homeowner’s liability on the mortgage would be limited to the property itself. This law protected borrowers since its inception in the 1930s, but it does not extend the protection for purchase money mortgages to loans that refinance the original purchase debt.
Most borrowers did not realize that by refinancing they were forfeiting their protections and becoming personally liable for the balance of the loan. In order to rectify this problem, we expect the California Senate to vote on SB 1178 (Corbett) sometime this week, extending anti-deficiency protections to homeowners who have refinanced “purchase money” loans and now are facing foreclosure. Go get ‘em senators.