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How to Mop up the Housing Mess: Let More People Walk Away?

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The New York Times looks at legislation being considered in California that would allow borrowers who refinanced their loans to walk away from their homes without settling debts owed to the bank. SB 1178, which was passed by the Senate earlier this month, would provide anti-deficiency protection for homeowners who have refinanced their original mortgage loans and now are facing foreclosure. The bill is sponsored by the California Association of Realtors (CAR), setting up a scenario that pits real estate agents against the banks (who say they'll support the legislation as long as only applies to new loans).

More via the paper: "The bill that passed the Senate by a lopsided vote of 30 to 4 would protect former homeowners up to the amount of their original loan. For instance, a family that took out a $500,000 mortgage to buy a house and then refinanced and took cash out, swelling their loan to $600,000, would be released from claims on the original sum but remain vulnerable on the $100,000.

Ellen M. Corbett, the Democratic state senator from San Leandro, Calif., east of San Francisco, who introduced the measure, said it is a matter of fairness.

During the Depression, she said, California legislators decided that losing your house was punishment enough. They did not want lenders endlessly hounding borrowers for the difference between what they owed and what their former house was worth, an amount called the deficiency." But now Corbett argues, a homeowner who refinanced their loan for reasons like getting a lower rate may now lose the house as the bank goes after the deficiency. Other lawmakers argue this will only lead to more defaults, while the Times also points out a key fact: Lenders in California "rarely chase foreclosed borrowers for deficiency judgments."

Meanwhile, C.A.R. President Steve Goddard, speaks out against why his group is fighting banks over the new loan clause. Via their press release (an older one): "C.A.R. has rejected proposed amendments to the bill by the lending industry that would restrict the legislation from applying to loans originated prior to 2011.

"The people that really need protection are the folks who refinanced in 2005 and didn't know its effect, not the folks who will get loans next year," Goddard said. "Lenders also tried to limit the legislation so that it applied to only the paid down balance of the loan that was refinanced, which C.A.R. staunchly opposed. That wouldn't take into account "cash out" loans where the proceeds went to improve the property, and therefore increase the property value."
· Battles in California Over Mortgages [New York Times]
· Victory for Consumers as California Senate Approves SB 1178 Extending Anti-Deficiency Protection [PR]