03/05/2008
A lawyer friend writes in response to Steve’s call for explanations of the California housing bubble:California has an anti-deficiency judgment statute that limits a lender’s recovery to the amount realized in a foreclosure sale. One would imagine that lenders would exercise greater caution in an anti-deficiency judgment state, but why bother when large financial institutions around the world were buying all the mortgage-backed securities thrown onto the market, the majority of which were rated AAA or AA by Moody’s and S&P.Some purchasers with no-down payment ARMs have done better as "homeowners" than they could have done as renters. As soon as the ARM rate bumps up, they simply stop paying rent and await foreclosure. When they are forced out, they have no liability even if foreclosure fails to satisfy the outstanding mortgages.
I’m not aware of any other state with a similar anti-deficiency judgment statute, although I haven’t researched the issue.
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