SB 931 Short Sale Deficiency Protection Bill
Effective January 1, 2011
SB 931 prohibits 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. "
Many banks have been unrelenting in their short sale approval letter verbiage on refinances, saying they will follow state laws to pursue a deficiency judgment. California lawyers sometimes argue that even if the loan was purchase money and exempt from a deficiency, such language in the short sale approval letter allowed the bank to pursue sellers after closing a short sale because the approval letter changed the status of the loan. California short sale sellers with a first mortgage will no longer have to worry about a deficiency judgment after a short sale.
This law pertains to first Trust Deed loans secured by 1-4 residential properties and does not have to be owner occupied. This law will also apply not only just for purchase money mortgages, but, for "hard money loans" which are first mortgage loans not used to originally purchase the home, such as a refinance.
SB 931 would further provide that if the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first mortgage or deed of trust, the above prohibition shall not limit the ability of the holder of the first deed of trust or mortgage to seek damages and use existing rights and remedies as specified.
This law will not change existing law relating to second mortgages in a short sale, so it still remains very important for sellers to obtain written relief from future deficiency judgments from second mortgage lenders in a short sale. Many attorneys still believe, however, that if a second mortgage was also a purchase money mortgage used to initially purchase the home, that the second loan would also still be non-recourse after a short sale, but there has not been definitive case law confirming this.
Our thoughts and comments on this subject: SB 931 was passed in the CA State Senate on 8-23-2010 and signed by the Governor on 9-30-2010. It went into effect on 1-1-2011. Much was made of the bill when it was passed, but it seems that it has become somewhat of a forgotten item since some time has passed until it took effect. Make no mistake about it, THIS NEW LAW IS A GAME CHANGER. Did you realize that this new law extends anti deficiency protection, that is the lender cannot pursue the short sale seller for collection of the shortage amount, to ALL FIRST TRUST DEED LOANS, EVEN REFINANCE LOANS. Did you realize that this law extends anti deficiency protection to ALL SHORT SALE SELLERS, EVEN ON THEIR INVESTMENT PROPERTIES. This is huge. This opens the door for many homeowners who are thinking about short sales as an option. Sellers who previously thought they could not avoid their lender pursuing them for their shortage can now short sale without recourse from the first Trust Deed lender. Please note that this protection does NOT apply to second Trust Deed lenders. The attached is a short legislative summary of the Bill. It is full of important points. I would encourage you to read it and get the information out to any and all of your clients who it may affect. I also have a shorts sale package that is full of other tax information, tips, and insights on short sales that I am certain you would find extremely helpful.
If you or someone you know is having financial troubles and are in fear of loosing their home please visit www.Help4Ca.Com
The above information is provided for educational purposes only and is not intended to be definitive legal advice. The specific facts of a case can have significant impact . Anyone going through a short sale or foreclosure should obtain legal counsel from a licensed real estate attorney.
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