California has enacted several anti-deficiency statutes to protect borrowers in real estate transactions. A “deficiency” is the liability of a borrower to the lender for the difference between the amount of the loan and the value of the real property. Existing California anti-deficiency laws protect a borrower on an original purchase-money loan (a loan acquired at the time the property was purchased and never refinanced) on an owner-occupied residential unit (up to four units) from being held personal liable to the lender for any deficiency that results from a short sale, or foreclosure. See, Civil Code of Procedures §580b and §580e. Under existing law, the anti-deficiency protection enjoyed by residential borrowers is strictly limited to the difference between the outstanding loan balance on an original purchase money loan and what the lender receives in a short sale, or foreclosure; existing anti-deficiency law does not afford any protections to residential homeowners who refinanced their original purchase money loan.

Effective January 1, 2013, a new California law will now protect borrowers on an owner-occupied residential property of not more than 4 units even if they refinance their original purchase money loan on or after January 1, 2013, so long as the homeowner does not "cash out" in the refinance. If the refinanced loan is purely a refinance of the original loan plus the cost of any attendant loan fees and related expenses, the borrower will now be afforded anti-deficiency protections. However, if the borrower pulls money out of the residential property to pay other bills, etc..), then the borrower would not qualify for California's anti-deficiency protections.

Unfortunately, the new anti-deficiency protections only apply to residential mortgage loans that are refinanced on or after January 1, 2013. As a result, homeowners who have refinanced their loans in the past will not be protected by the new legislation.