10.09.10
New Short Sale and Deficiency Judgment Laws for 2011 (2010-31)
Q. I am considering a short sale for the single family residence I own in California. Are there any new laws that I should consider when deciding whether, or when, to short sell my house?
A. The California legislature and governor have been busy working on real estate-related legislation. The following summarizes legislation regarding short sales and the related issue of deficiency judgments:
Short Sales: A “short sale” is an agreement between a mortgage lender and a borrower whereby the lender agrees to release the lender’s security interest in real property to facilitate a sale of the property for an amount less than what is owed on the loan. Short sales typically occur where the fair market value of the property has declined and, at the time of the sale, is less than the outstanding balance of the loan which is secured by the property.
Some lenders, as a condition of approving short sale agreements, have required homeowners to agree to repay, at some future date, the difference between the balance owed on the mortgage loan and the sale price of the property, thus effectively converting a secured loan which, effectively, is worthless as to that amount, into an unsecured loan. More information on this lending practice may be obtained at: http://earlelaw.com/Newsletters-2009/EarleLaw-Newsletter-2009-40.pdf
Effective January 1, 2011, SB-931 makes it unlawful for lenders who enter into short sale agreements to require repayment of any amount over the sale price of the property.
Deficiency Judgments: California’s anti-deficiency statutes, enacted in the 1930’s during the Great Depression, provide that, for “purchase money” mortgages, the liability of a homeowner who defaults on a mortgage used to purchase real property is limited to the property itself. In other words, the anti-deficiency statutes prevent lenders, following foreclosure, from pursuing borrowers for any amount owed on a mortgage loan which the lender was not able to recover in the foreclosure process. When California’s anti-deficiency statutes were enacted, the refinancing of real estate loans, for example, to obtain a lower interest rate, was not as common as it is today. Consequently, the protection provided by California’s anti-deficiency statutes applies only to mortgage loans used to purchase property. The protection is lost when a mortgage loan is refinanced.
Senate Bill (SB) 1178, to extend anti-deficiency judgment protection to refinanced loans, was approved by the California legislature. The governor, however, vetoed the bill, stating that if enacted, SB-1178 would impair existing contracts. More information on California deficiency judgments may be obtained at: http://earlelaw.com/Newsletters-2010/EarleLaw-Newsletter-2010-12.pdf
*Anthony F. Earle, Esquire is a California attorney who practices in the Silicon Valley area of northern California. He can be reached at: anthony.earle@earlelaw.com. This article is intended for information and educational purposes only, and is not intended to constitute legal advice.
