SB 931 California Deficiency Judgments After A Short Sale Passed

By
Real Estate Agent with Alliance Group Real Estate

Senate Bill 931 (SB 931) pertaining to California Short Sale Deficiencies was signed by the Governor on September 30th. Beginning January 1st, 2011 any first mortgages that accept a short sale will not be able to obtain a deficiency judgment against a seller after the completion of a short sale.  If a lender provides written consent to a short sale on a first mortgage, they lender must accept the sales proceeds as full payment and discharge the remaining balance due on the loan.  The new law will apply to all first mortgage loans secured by one to four residential units, including purchase money, hard money and refinanced loans.   The new law does not prevent the lender from seeking damages for fraud or waste by the borrower.

The legislative counsel's summary of the bill follows:

"This bill would prohibit a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of not more than 4 units in any case in which the (owner) sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. The bill would provide that written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage. "

The new law only applies to mortgages in the first lien position. It is still very important for any borrowers with a second lien to get in writing that any future deficiency rights are waived.  While many attorneys believe that if a second mortgage is purchase money, that the seller will be protected under the non-recourse laws, there has not been any definitive case law to reflect this.

Our team has been very successful in negotiating short sales with the majority of the banks out there and obtaining in writing that that the deficiency rights are waived.  It is extremely important for you to have an experience team on your side. Please feel free to contact us with any questions and to review your situation.

 

** We are not attorneys or tax experts. The information in this blog post and comments is for informational purposes ONLY. It will serve in a starting point to further investigate how a short sale or foreclosure may affect you. We HIGHLY RECOMMEND that you consult an attorney and tax advisor regarding your situation BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure. **

 

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Rainmaker
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Marcy Moyer
Keller Williams Realty Palo Alto Probate & Trust Specialist - Palo Alto, CA
CDPE

I am not sure I understand the difference between this new law and old law since Ca is a non recourse state. Also, I thought the issue of refinanced loans was vetoed by the governor.

Oct 05, 2010 09:27 PM #1
Rainmaker
286,439
Melanie Ross
Coldwell Banker Solano Pacific - Benicia, CA
Benicia CA & Vallejo CA Real Estate, 707-319-2828

Glen, Actually we had an attorney speak at our Realtor meeting.  He said that the law does not discriminate between 1st, 2nd or 3d purchase money loans, if purchase money then is nonrecourse.  I know the one bill was vetod but I had not heard of this one being passed.  Thanks for the info!

Oct 05, 2010 10:26 PM #2
Rainmaker
71,706
Glen Henderson
Alliance Group Real Estate - San Diego, CA
San Diego - Broker / Realtor

Marcy - The previous non-recourse laws only pertain to a property that goes to foreclosure. There is nothing specific to short sales and there has not been any case law to support whether it would or would not apply.  Senate Bill 1178, which addressed loans that have been refinanced and could be in the 2nd lien position, was vetoed by the Governor.

Melanie - This law does specifically state that it is on first mortgages. From the legislative digest:

"This bill would prohibit a deficiency judgment under a note
secured by a first deed of trust or first mortgage for a dwelling of
not more than 4 units in any case in which the trustor or mortgagor
sells the dwelling for less than the remaining amount of the
indebtedness due at the time of sale with the written consent of the
holder of the first deed of trust or first mortgage.

You can read the bill here: Senate Bill 931 (http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=sb_931&sess=CUR&house=B&author=ducheny)

Oct 06, 2010 12:28 PM #3
Anonymous
Anonymous
Rob

I wonder if this will reduce the amount of short sale activity and increase forclosure activity?  While it's cheaper to short sale for lenders, I wonder if that will make any difference..

Good info, thanks!

Oct 20, 2010 08:33 PM #4
Anonymous
Anonymous
Jason

But none of this address' the debt forgiveness and CA coming back looking to tax the income on the debts that are foregiven?  Even if they can't get a judgement are they going to 1099 the borrowers for the "foregiven" debts?

Nov 10, 2010 12:40 PM #5
Rainmaker
137,388
Aida Pinto
United Associated Brokers - Downey, CA
Real Estate Broker (562) 916-3237

Thanks for this blog. 

I think that California tax law was consolidate to coincide with the 2007 Tax forgiveness act...but check with a tax accounted or a lawyer...since I am neither and I am not allowed to give tax or legal advice.  I'm just "the short sale diva" in Los Angeles county.....trying to know everything their is about Short sales...lol!

My understanding of a Non-recourse loan is that purchase-money loan secured by someone's principal residences is not subject to a deficiency judgment...a non-recourse loan means that the lender's only recourse to recoup monies from the sale of the property its self and not from the owner. 

That has always been the case but when you re-financed a property you basically have turned your non-recourse loan into a recourse loan which means that the lender could come after you for any losses they incur but now with this California Senate Bill 931 they can't come after the owner on a short sale regardless of whether its a purchase or a refinance.  I think that's very good news.  I think I will write a blog about this as well.

 

Nov 13, 2010 03:10 PM #6
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Rainmaker
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Glen Henderson

San Diego - Broker / Realtor
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