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  • July 2011
    M T W T F S S
    « Jun   Oct »
  • Mary K. Lenahan, J.D., Realtor

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New CA Law: Expanded Protection for Sellers against Deficiency Judgments after Short Sales

Altadena Home, Poppyfields Neighborhood

Altadena Home, Poppyfields Neighborhood

On July 15, 2011 California Governor Brown signed into law Senate Bill 458 which provides greater protection to sellers in short sale transactions from personal liability.

The new law prohibits any lienholder, regardless of whether it is a senior or junior lienholder, who agrees to a short sale from pursuing the seller for a deficiency judgment.  In other words the lender cannot sue the borrower for the difference between the sale proceeds and the balance on the note.

Senate Bill 458 extends the protection against deficiency judgments contained in the recently passed Senate Bill 931 which became effective on January 1, 2011.    Senate Bill 931 merely prohibited the first lienholder from pursuing a deficiency judgment following a short sale.

The California Association of Realtors (CAR) opposed SB 931, arguing that it did not go far enough since it did not include junior lien holders.   CAR sponsored SB 458 to include all lien holders and was able to successfully see the bill pass this month.

According to C.A.R. President Beth L. Peerce:

“SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders– those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

SB 458 will amend California Civil Procedure section 580e.   [C.C.P. section 580e].

Can the Lender Force a Seller to Pay Money Over the Sale Price?

Like most things in law, the answer depends upon how you frame the facts.   The statute specifically prohibits a note holder from requiring additional compensation from the seller:

“A holder of a note shall not require the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.”   C.C.P. section 580e(b)

According to CAR, however, the above provision does not prohibit a homeowner from “voluntarily” offering additional monies to the lender with the hopes that a lender will agree to a short sale.   A lender may also negotiate for a contribution from someone other than the borrower, such as other lenders, agents, and relatives.

When is the Effective Date of Senate Bill 458?

SB 458 is effective immediately due to the “urgency” of the need to mitigate “the ongoing foreclosure crisis and to encourage the approval of short sales as an alternative to foreclosure”

Will the New Law Help Homeowners?

Like most laws passed purporting to “assist homeowners,” the cards are stacked in favor of the bank/lender/purported note-holder, whoever that may be.   The purported note-holder still has absolute authority to decide whether to accept a short sale or not, and is not required to consider the homeowner’s interests at all.

Financial contribution by the Seller is still an item of negotiation since a “voluntary” contribution may be necessary to obtain the lender’s agreement to a short sale.

The legislation does, however, provide important protection against homeowners unknowingly exposing themselves to deficiency judgments by short selling their homes.

What Kind of Properties Qualify for Protection under the amendment to C.C.P 580e /SB 458?:

The deficiency judgment prohibition applies to a broad category of 1 to 4 residential units with exceptions noted below.  It applies to:

•Cash-Out Refinanced loans

•Non-Owner Occupied Homes

•Second Homes

•Vacation Homes

Are There Exceptions to C.C.P. section 580e? (SB 458):

Section 580e does not apply in the following circumstances:

  • Where debtor is a corporation, limited  liability company, limited partnership, or political subdivision of the state.   C.C.P.  580e( d)(1).
  • Where debtor engages in fraud in the sale or waste of the property  C.C.P. 580e( c).
  • A lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.    C.C.P. 580e(d)(2).
  • For other exceptions that may apply to your specific factual scenario, speak to a lawyer.

One Response

  1. […] 580e has been amended to include all lienholders, senior and junior lienholders, pursuant to SB 458 sponsored by the California Association of Realtors and which became effective on 7-15-11. Mary K. […]

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