California's Short Sale Legislation

This past summer the California Legislature approved Senate Bill 931 (SB 931) amending Code of Civil Procedure CCP §580e to provide for anti-deficiency protection to certain short sales. Short sale sellers have been traditionally faced with the possibility that their lender would seek a deficiency i.e., the difference between the sales price set forth in the short sale and the existing loan balance. While in many sales for less than the full balance of the existing loans, the paperwork provided by the bank provides for a waiver of the deficiency, most such paper work contain a warning to the seller that the bank was retaining its option to recover the deficiency by an action in court. With the passage of SB 931, which went into effect on January 1, 2011, a borrower that comes within the language of the statute no longer needs to worry that he or she will be sued by the lender for the difference between the loan balance and the sales price received by the lender. It should be noted, however, that this anti - deficiency protection is afforded only to a loan secured by a first trust deed. Furthermore, it applies only to a single family residence which the statute defines as " a dwelling of not more than four units." There are certain limitations to this anti - deficiency consumer protection statute. The first and most important limitation is that it does not apply to junior liens. Thus, the holder of a note secured by a second trust deed would still retain the right to sue for the non - payment of the note. Another limitation is that it applies only to human borrowers not corporations. Interesting, however, there is no requirement that the human borrower be an owner occupant. Finally, this statute does not apply when the borrower commits either fraud. While this statute, on its face, may be a boon to short sales in that it insulates the homeowner from deficiencies in connection with a sale for less than the balance of the loan, there is a potential that this recent enactment will have a chilling effect on short sales because note holders, who can no longer sue for a deficiency, will likely require higher payoffs to offset the potential recovery that they formerly had when deficiencies were possible.

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