How the Housing Law Affects Reverse Mortgages - US News and World ReportHere's how the new law affects reverse mortgages and what you still need to be wary of.
Instant cash—with strings. A reverse mortgage is a loan against your home if you're generally age 62 and over that doesn't have to be paid back as long as you live in that house. Tapping home equity to finance your golden years is growing in popularity, with 107,367 reverse-mortgage loans made in fiscal year 2007, up from 6,600 loans in 2000, but they still account for only about 1 percent of older households, according to the AARP. After you pay a variety of fees on the loan, you can get a lump sum, monthly payments, a credit line, or a combination of these options based on the value of your house. If the home is sold, the loan must be repaid with the proceeds, and any equity that remains after that is distributed to the borrower.
Know the limits. Most reverse mortgages are home equity conversion mortgages, which are backed by the Federal Housing Administration, so you'll still get your money even if the lender goes under. (The other two types are private loans and single-purpose reverse mortgages offered by some state and local government agencies and nonprofit organizations.) FHA limits the amount you can borrow with a HECM, which ranges from $200,160 to $362,790, depending on the county you live in. The new housing law, which will take approximately 60 to 90 days to implement, creates a single national loan limit of $417,000 that can increase to as much as $625,500 in high-cost areas.
ceb.com: Reflections on the Mortgage Forgiveness Debt Act of 2007
The problem arises, however, when a taxpayer refinances an original purchase money mortgage and uses the "refi" proceeds for purposes other than (or in addition to) the acquisition or substantial improvement of the principal residence. Most lenders believe that any refinancing of a home mortgage removes the "purchase money mortgage" protection under California law and results in recourse liability against the borrower. Although this remains unclear, if such is the case, then debt discharged on a refinanced home mortgage would cause a California borrower to have cancellation of indebtedness income that might be excluded under the Act. Furthermore, to the extent a borrower has pulled out cash from a refinanced mortgage and used it, say, to pay off credit cards or other debts, the loan obligation is recourse under California law. But in that case, if part of the loan is discharged or forgiven by the lender, the borrower will have cancellation of indebtedness income that is not excluded under the new law because it was not used as "acquisition indebtedness." This is a trap for the unwary, and will require taxpayers and their advisors to keep accurate records of all home loan borrowings and the use of such proceeds.
Memorandum Decision re: Waiver of Anti-deficiency Provision of C.C.P. § 5806 | United States Bankruptcy CourtThe plaintiffs, Minoru and Marianne Togami, commenced this adversary proceeding after Fresno Apartment Holders foreclosed on its interest in the real property located at 1544 East Fedora Avenue, Fresno, California, which is a 93 unit apartment building. The Togamis originally acquired the Fresno apartment building in 1982 from Joyce Kakinami pursuant to a tax deferred real estate exchange. The purchase price was $1,920,000. To finance the purchase, the Togamis assumed various notes and deeds of trust against the property, including a purchase money promissory note executed by Kakinami (the "Note"). The Note included an obligation by the maker to refinance the Note on or before April 1987. The lender, Fresno Investors, a Limited Partnership, also agreed to subordinate the obligation under the 1982 Note to new financing and to accept a new note in the principal amount of $325,000. The Togamis were unable to acquire a new loan by April 1987 and defaulted on the original purchase money Note.
In August 1987, the Togamis were able to refinance the 1982 purchase money Note through a loan from Imperial Thrift and Loan Association ("Imperial"). Fresno Apartment Investors agreed to reconvey the deed of trust in exchange for a new secured promissory note. The Togamis executed a new note to Fresno Apartment Holders in the principal amount of $350,421, which includes arrearages that accrued as a result of the default. The new note contains the provision, "This note is not a purchase money note and there is full recourse to the Maker."
The Togamis filed a voluntary chapter 11 petition on January 12, 1990. Imperial, the holder of the first deed of trust, sought and obtained relief from the automatic stay and conducted a foreclosure sale on April 24, 1991. No proceeds of the foreclosure sale were available for distribution to Fresno Apartment Holders, the holder of the third deed of trust. From the time of acquisition, the Togamis operated the property as an apartment complex and made no modifications or alterations to the property. DISCUSSION A. Transactions Subject to Anti-Deficiency Protection
California Code of Civil Procedure § 580b provides in pertinent part:
No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust, or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage 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 part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
C.C.P. § 580b precludes purchase money lenders and vendors from obtaining a deficiency judgment against the borrower after foreclosure. The issue is whether the Togamis have waived the anti-deficiency protection of C.C.P. § 580b under the 1987 refinance by the language in the new note, which indicates that the anti-deficiency provision does not apply to the transaction.
In general, a purchase money loan acquires its character at the time the loan is made and retains its character absent subsequent waiver. Brown v. Jensen, 41 Cal. 2d 193, 197, 259 P.2d 425 (1953), cert. denied, 347 U.S. 905 (1954). A purchase money loan retains its character notwithstanding subsequent assignment of the mortgage and note. Ziegler v. Barnes, 200 Cal. App. 3d 224, 231 fn. 6, 246 Cal. Rptr. 69 (Cal. Ct. App. 1988).
The anti-deficiency provision of § 580b applies only to standard transactions. The traditional standard purchase money transaction involves the purchase of property where the buyer gives the seller a promissory note for the balance of the purchase price secured by a deed of trust on the property. The second standard purchase money transaction involves the purchase of property where the buyer gives a third-party lender a promissory note for the balance of the purchase price secured by a deed of trust on the property, which is an owner-occupied residential property containing four or fewer units.
It is undisputed that the Togamis assumed the Kakinami Note, which is a purchase money note, in connection with their acquisition of the apartment building. A subsequent assignee of a purchase money note is subject to the protections of the anti-deficiency provisions of § 580b. Ziegler v. Barnes, 200 Cal. App. 3d at 231. On that basis, the court concludes that the transaction in question is a standard transaction to which the anti-deficiency provisions of § 580b would normally apply. B. Policy Underlying § 580b
California historically has had a strong public policy against deficiency judgments. The policy objective of the anti-deficiency legislation is to place the risk of inadequate security on the lender, who is in the best position to know its true value and to discourage a seller or lender from overvaluing the collateral above its fair market value. Roseleaf v. Chierighino, 59 Cal. 2d 35, 42, 27 Cal. Rptr. 873 (1963). The Roseleaf court articulated the policy objectives as follows:
Section 580b places the risk of inadequate security on the purchase money mortgagee. A vendor is thus discouraged from overvaluing the security. Precarious land promotion schemes are discouraged, for the security value of the land gives purchasers a clue as to its true market value. (Citations omitted). If inadequacy of the security results, not from overvaluing, but from a decline in property values during a general or local depression, section 580b prevents the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability. Section 580b thus serves as a stabilizing factor in land sales.
Id. By enacting the anti-deficiency legislation, the California Legislature sought to prevent a secured creditor from selling the property at a foreclosure sale for less than its fair market value and then recovering a personal judgment from the borrower for the difference between the sales proceeds and the balance of the unpaid debt. Id.
Because of its strong public policy objective, the anti-deficiency protection cannot be altered or waived at the time the purchase money obligation is created or renewed. Palm v. Schilling, 199 Cal. App. 3d 63, 69, 244 Cal. Rptr. 600 (Cal. Ct. App. 1988). A seller's lien remains subject to the anti-deficiency protection even when it is subordinated to a subsequent refinance loan. Thompson v. Allert, 233 Cal. App. 3d 1462, 1466-67, 285 Cal. Rptr. 367 (Cal. Ct. App. 1991). After the lender has received the secured note, the lender can alter or modify its terms, extend or renew the terms of the note, or substitute other or additional security for the note. As long as the obligation is secured by the same property and remains substantially the same as when it was originally created, the purchase money limitations continue to protect the borrower. Jackson v. Taylor, 272 Cal. App. 2d 1, 5, 76 Cal. Rptr. 891 (Cal. Ct. App. 1969).
A transaction which does not serve the public policy objectives of the anti-deficiency statute is non-standard, and the anti-deficiency provisions generally do not apply to the non-standard transaction. Spangler v. Memel, 7 Cal. 3d 603, 612, 102 Cal. Rptr. 807 (1972); Union v. Anderson, 232 Cal. App. 3d 941, 946, 283 Cal. Rptr. 823 (Cal. Ct. App. 1991). However, even in transactions that vary from the standard, the anti-deficiency statute applies if the factual circumstances come within the purposes of the statute. Roseleaf, 59 Cal. 2d at 41. C. Exceptions To Anti-Deficiency Protection
Under certain circumstances, the anti-deficiency protection of § 580b can be waived. For example, the seller's voluntary subordination of the purchase money deed of trust to a subsequent lien to secure a construction loan for commercial development constitutes an effective waiver of the anti-deficieny protection. Spangler v. Memel, 7 Cal. 3d at 614. The reason the buyer becomes personally liable is that the risk of deterioration of the property's value shifts because the use of the property has changed. The substitution of collateral may also provide the basis for the waiver of the anti-deficiency statute. Goodyear v. Mack, 159 Cal. App. 3d 654, 658, 205 Cal. Rptr. 702 (Cal. Ct. App. 1984). Although some courts have held that a material and substantial modification to the terms of a purchase money note may also constitute a waiver of the protection of § 580b, Russell v. Roberts, 39 Cal. App. 3d 390, 114 Cal. Rptr. 305 (Cal. Ct. App. 1974), the majority position is that subsequent events do not alter the effect of § 580b. Brown v. Jensen, 41 Cal. 2d 193, 259 P.2d 425; Paramount Savings & Loan Ass'n v. Barber, 263 Cal. App. 2d 166, 69 Cal. Rptr. 390; Roger Bernhardt, California Mortgage and Deed of Trust Practice § 4.24 (2d ed. 1990 & Supp. 1992).
Fresno Apartment Holders argues that Russell v. Roberts, 39 Cal. App. 3d 390, which holds that Cal. Civ. Code § 2953(1) does not prevent the waiver of the anti-deficiency provision of C.C.P. § 580b in connection with the making or renewing of a purchase money loan, is controlling and that a subsequent waiver of the anti-deficiency protection of C.C.P. § 580b may constitute consideration for the renewal of a purchase money loan. However, since Russell v. Roberts, another California appellate court has clarified that the protection against a deficiency cannot be waived, stating that Cal. Civ. Code 2953's prohibition against waivers of privileges is consistent with § 580b. Palm v. Schilling, 199 Cal. App. 3d 63. The court finds that Russell v. Roberts is an aberration from those cases that hold that a subsequent waiver of the anti-deficiency protection is contrary to the public policy objectives underlying § 580b. Thompson v. Allert, 233 Cal. App. 3d 1462; Palm v. Schilling, 199 Cal. App. 3d 63. To hold otherwise would be against the weight of the authority and would be contrary to the policies underlying the anti-deficiency statute. CONCLUSION
Based upon the foregoing reasons, the Court concludes that the debtors cannot waive the anti-deficiency provision of C.C.P. § 580b, and the subsequent refinance of the 1982 purchase money note did not operate as such a waiver. Accordingly, judgment is granted for the debtors, and the note to Fresno Apartment Holders remains subject to the California anti-deficieny provisions in C.C.P. § 580b.
Good cause appearing, it is SO ORDERED.
1Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon him by sections 2924, 2924(b), 2924(c) of the Civil Code or by sections 580(a) or 726 of the Code of Civil Procedure, shall be void and of no effect . . . . Cal. Civ. Code § 2953.
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