Once news is out that the State Senate approved the bill, which was also passed by a State Assembly committee for the proposed legislation, giving protection for -distressed home owners forfeiting their homes to foreclosure, to be pursued by lenders for balance outstanding - there is a furor going on. Realtors sponsor the bill, but bankers' group oppose it and want changes. The law if approved finally during summer will affect entire California, including SF Bay Area.
What are the points put forth? Rodney Brown, chief executive of the California Bankers says "We do not wish for the California Legislature to go in and amend contracts; the banking industry is very supportive of extending these kinds of protections, but the idea of breaking a contract between the borrower and the lender is not really consistent with contract law in the U.S. or the way to do business."
While many homeowners default due to financial problems, instances are also there - some owners strategically stop paying to mortgage, but continue paying their other debts like auto loan, credit cards etc. If the bill is passed as legislation, lending banks would find it difficult to pursue for their balance dues of borrowers - including strategic delinquents; refinanced properties and those with genuine problems to continue paying.
Real estate lawyers in Bay Area and elsewhere in California say they are getting calls from troubled owners, very frequently, for advice to work their loans with lenders. It is the experience of many such owners that even if they pursue a short sale - where the lending bank allows them to sell the property for less than what is due on mortgage and forgives the difference in balance - they are on the hook for the unpaid balance at a later date.
Alex Creel, senior vice president and chief lobbyist for the California Association of Realtors, apprehends if the state legislation goes the way the bankers want it to, it could hamper former owners' ability to ever buy a house again and would violate fundamental principles of fairness.
He says "our thinking is why should refinancing the loan, and nothing more, result in a loss of protections that you had when you made the loan at the outset; but in California, you lose that protection, and it's not as if the lender tells you about it. But you lose it nonetheless. We've heard of lenders saying, we're not going to agree to a short sale unless you sign a contract to pay all or some of the deficiency; and it's not a hollow threat because currently, they are entitled to do it; lenders have four to six years to obtain a judgment against a borrower, but the judgment is good for 10 years and can be extended for another 10 years."
On the other side, Paul Leonard, director of the California office for the Center for Responsible Lending in Oakland is of the opinion that the law needs to be changed, because there is no express reason for the distinction between those who refinance and those who don't, but the difference has enormous financial implications.
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