Foreclosure in Sacramento>Question Details

Cyrnos, Home Owner in Sacramento, CA

Does the FHA/HUD deficiency judgment rule supersede CA law?

Asked by Cyrnos, Sacramento, CA Sat Apr 21, 2012

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Ute Ferdig - Atty. Negotiator’s answer
This may seem like hair splitting, but it is important to understand that the homeowner's post-foreclosure exposure to liability is not a deficiency question when it comes to government insured loans.

If the underlying loan was a VA, FHA or other government insured loan, the 9th Circuit Court of Appeal, which covers all of California, has said that the government has an independent right to pursue a loss that they pay under the insurance program. See Carter v. J Derwinski (1993), 987 F. 2d 611. The Court made it clear that all State anti-deficiency laws are not relevant and the federal government’s right to pursue indemnity under the insurance contract is independent from the foreclosure and they have a right to purse the borrower.

What is interesting to me is that borrowers have to pay for the mortgage insurance, and then when they default and the insurance coverage for which they paid kicks in, they may have to pay again to indemnify for money that was paid.
1 vote Thank Flag Link Thu Jun 7, 2012
Ute Ferdig -…, Real Estate Pro in New Castle, DE
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Thanks for the information. As I said, my knowledge on this subject comes from before the 9th Circus heard that case. What I do find interesting is that even with that precedent it is extremely rare for HUD to go after the borrower’s money after they lose the home.

You make a good point about the mortgage insurance being paid by the borrower and then having to pay the indemnification as well. Of course the way the mortgage insurance is presented is that it is a fee to use the program and cover the investor’s loss making the program viable. Still the case can be made…
Web Reference: http://www.SacRELender.com
0 votes Thank Flag Link Thu Jun 7, 2012
You ask a question that I have heard for over 25 years. I’m not an attorney, but I have asked several, and they all seen to have different opinions. What I have heard is FHA is of the opinion that their law supersedes the California law, but they have not challenged that belief in court.

My real estate law professor’s answer was (paraphrased, since it was a long time ago) “There is a legal conflict that would probably need to be addressed by an appellate court – and possibly the US Supreme Court.” The legal question is can the federal government create a loan program that is uniformly administered throughout the country, or do they have to conform to 50 different state standards? Since it has never been elevated to an appellate level to my knowledge, I guess the answer remains “maybe.”
Web Reference: http://www.SacRELender.com
0 votes Thank Flag Link Wed Apr 25, 2012
Thanks for your thoughtful answer...I will just proceed and let the "maybe" happen.
Flag Wed Apr 25, 2012
It shouldn't, unless you signed something giving up your protections provided by California law. You need to talk to an Attorney and find out what your options are. Find one who will give you a free half hour. You can contact your local HUD office as well.
0 votes Thank Flag Link Tue Apr 24, 2012
Thanks for your input.
Flag Tue Apr 24, 2012
Elizabeth is correct. HUD is not the party who would be pursuing any deficiency judgment. They are the insurer of the loan. I'm not an attorney either and am not familiar with which particular 'rule' you are referring to.

But let me guess at something here. If you are in a position concerned that your home will be foreclosed, I would speak to a realtor directly that is specialized in short sales. A short sale will always be a better alternative, if it can be approved, than a foreclosure. A foreclosure hurts YOU the worst of all alternatives. It also has the worst effect on your neighborhood and all of us as taxpayers. When working with a realtor, many have access to attorneys and tax advisors who can give you the guidance on those two issues, which are outside our expertise.

In most cases, though, the rule that is most specific, ends up being that which is enforced. California put into law some protections above and beyond federal laws for those homeowners facing foreclosure or resolving through a short sale. This includes SB 458 which Elizabeth refers to.
0 votes Thank Flag Link Sun Apr 22, 2012
Thanks for your info and assistance.
Flag Mon Apr 23, 2012
Hi Cyrnos
You can pose your question to an attorney for free at http://WWW.lawguru.com.

CA law has several anti deficiency provisions . You should check with an attorney whether your loan falls into the category.

Is it a purchase money first loan? Or a Refi? Are you thinking of foreclosure or short sale? These are some info needed by the attorney.

Hope that helps.
0 votes Thank Flag Link Sat Apr 21, 2012
Thanks for the info and the links.
Flag Sat Apr 21, 2012
Again you should get legal advice...I am not aware of this happening to any of my past clients, however I believe deficiency judgments can be pursued for 4 years after the completion of a short sale or foreclosure. I suppose there is potential for this to happen in the future, depending on the circumstances of each individual.
0 votes Thank Flag Link Sat Apr 21, 2012
Thank you for your info.
Flag Sat Apr 21, 2012
Erin Stumpf…, Real Estate Pro in Sacramento, CA
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I have negotiated short sales for the past 4 years and even before CA law extended the anti-deficiency protections to short sales, I closed only 1 short sale (in 2008) with a borrower still on the hook for a deficiency and that was mainly because in 2008 we were still in the infant stages of short sales and lenders were more reluctant to forgive the remainder of the loan balance. The particular short sale did not involve an FHA loan and I don't know if the lender tried to collect after the close of escrow. Collecting on a deficiency after foreclosure only becomes an issue if the lender either foreclosed judicially (very rare in CA), the borrower committed waste or fraud (unfortunately not so rare) or there was a non-purchase money second loan (also not so rare). If the borrower trashes the house, the lender has the right to seek a deficiency even after a non-judicial foreclosure. Whether or not the lender will pursue the borrower is hard to predict. Probably depends on what they think they have to gain. If the borrower committed fraud at the time of the loan application, the lender can also pursue a deficiency judgment. Proving fraud may not be easy and there are also rules in bankruptcy that may prevent the lender to pursue a deficiency judgment based on a claim of fraud. If the borrower had a non-purchase money junior loan, the junior lender whose security interest gets wiped out in the foreclosure by the first may pursue a deficiency judgment or issue a 1099 C. It's the lender's choice. The lenders have 4 years after the borrower's last mortgage payment to decide which route they want to take. When the lender issues a 1099 C, it means that they have made a decision not to pursue, but until that has happened, the borrower will not know what the junior lender will do, which is a definite disadvantage of foreclosure. We started seeing short sales in 2007, but compared to today, there were very few actual closed short sales. Because of the 4-year statute of limitations, it may be too early to tell for sure what the majority of lenders will do unless the borrower has received the 1099 C indicating debt cancellation. I hope this helps.
0 votes Thank Flag Link Sat Apr 21, 2012
Thank you for your thoughtful response and experience. It is appreciated.
Flag Sat Apr 21, 2012
Ute Ferdig -…, Real Estate Pro in New Castle, DE
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Thank you one and all for your input. My question really goes to the actual experience of folks in the field. Has HUD attempted in California to go after deficiency judgments with either a sort sale or failing that, a foreclosure? Thanks for your input on the recent experience or history.
0 votes Thank Flag Link Sat Apr 21, 2012
I would not want to assume that I know to which specific FHA/HUD rule you are referring. As a general rule, CA anti-deficiency laws apply to FHA loans, but without knowing your situation, it's impossible to answer your question. Like the others said, legal questions should be asked of attorneys, not real estate agents, but even an attorney would need more info to answer your question.
0 votes Thank Flag Link Sat Apr 21, 2012
Ute Ferdig -…, Real Estate Pro in New Castle, DE
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I agree, consult an attorney for legal information. A good rule of thumb to remember though is that federal laws trump state laws, state trumps county and municipality laws. It's in our constitution.
0 votes Thank Flag Link Sat Apr 21, 2012
Hi Cyrnos,

As others have stated, a real estate agent is not the one to be asking legal questions to, it is beyond our scope, you need to speak with an attorney who can evaluate your specific situation and question.
0 votes Thank Flag Link Sat Apr 21, 2012
Elizabeth is correct. You really should consult an attorney. It sounds as though you may be considering allowing your home to foreclose? There are different tax and legal ramifications for foreclosures vs. other options like a short sale, loan modification, bankruptcy, etc. An attorney can assist you to determine how different laws will apply to your specific situation and advise you on which is the best option for you.
Web Reference: http://www.soldinsac.com
0 votes Thank Flag Link Sat Apr 21, 2012
Erin Stumpf…, Real Estate Pro in Sacramento, CA
MVP'08
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