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If you are a homeowner who was lucky enough to buy when mortgage rates were low, you may have no interest in refinancing your present loan. However, if you bought your home when rates were higher, or perhaps you have an adjustable rate loan and would like to refinance, be cautious.
The number one thing most people consider when buying out their current mortgage and financing a new loan are the costs associated with the refinancing. Costs can include prepayment penalties, application fees, credit report fees, appraisal and legal fees, as well as the potential for private mortgage insurance and additional life insurance coverage.
However, one more important aspect to consider when refinancing that most people overlook but that could have disastrous consequence is the waiver of the anti-deficiency. These provisions of section 580b of the California Code of Civil Procedure protects the consumer from the lender institution from coming back and making the consumer pay for any losses associated with the failure to pay their mortgage after they have been foreclosed on.
Section 580b prevents a lender from holding a borrower personally liable for a balance on the mortgage when a person’s house is foreclosed on by the bank. To qualify for this protection, the law states that “a mortgage or deed of trust 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 a part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.” In regular English this means that you used all the money the bank lends you to buy the property (i.e. you didn’t use some of the money to buy a car or remodeled your home). This is called a “purchased money” mortgage.
If an owner refinances a purchase money mortgage, which is protected by ¬ß 580b, does the immunity from a deficiency judgment continue? The question is particularly relevant when the owner is a homeowner who has ¬ß 580b protection refinances with a different bank or lender. The answer depends on whether the original mortgagee is paid off, or new security is substituted.
Several courts have held that for the case where the original loan is paid off, the ¬ß 580b immunity will be lost. The court reasoned that the pay-off of a purchase money mortgage was a transaction not cover under ¬ß 580b protection. The California Civil Code requires an initial disclosure of the anti-deficiency protection to purchase-money mortgage borrowers, but it does not require disclosure of the potential loss of that protection during refinancing.
The absence of an enforceable duty to disclose anti-deficiency protection or the conditions of its loss means that many borrowers which are typical homeowners who are without legal representation are vulnerable to losing the protection of ¬ß 580b without notice or recourse or even knowing that it existed in the first place.
Refinancing dramatically changes the risk allocation between lender and borrower of overvaluation of the collateral – the home – by shifting it overwhelmingly to the borrower. The true cost of refinancing, then, can only be known if the loss of ¬ß 580b anti-deficiency protections is factored into the equation when making the decision to refinance.
With that said, do your research well and seek legal advice on the interpretation of your loan before your consider refinancing.
The purpose of this column is to provide general information on the law, which is subject to change. It is not legal advice. Consult a lawyer if you have a specific legal problem.
Published: February 2, 2012 – Volume 10 – Issue 42