2012 FORECLOSURE UPDATE

By William E. Winfield

Under California Code of Civil Procedure section 580b, homeowners who borrow money to purchase their homes are protected against creditors seeking to recover on the deficiency that may result if the lenderforecloses. This protection is lost when the mortgage is refinanced, as the loan is no longer a “purchase money loan” because the borrower is changing the loan after the property was acquired.

A new law championed by the California State Bar’s Insolvency Committee adds subsections 580b(b) and 580b(c) to extend the statute’s protection to credit transactions after January 1, 2013 that are used to refinance a purchase money loan, “except to the extent that in a credit transaction, the lender or creditor advances new principal… 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.”

 Caveats:

1. The original refinance must not have closed before January 1, 2013. This means loans that close this year will not be covered by this new law.

2. The law applies only loans that were originally “purchase money loans” and not to guarantees, construction loans, home equity lines taken out after the purchase of the home, etc.

3. The law does not provide protection against second trust deed lenders unless that loan was originally a “purchase money loan.”

William E. Winfield practices business, bankruptcy and creditor-debtor law at Nordman Cormany Hair & Compton LLP, (805)988-8326 or (805)988-8324.

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