November 15, 2010
While the New Year is still several weeks away, the celebration has already begun with the passage of California’s Senate Bill 931to ban deficiency judgments after a short sale. Beginning January 1, 2011, any first mortgages (lenders) that accept a short sale will not be able to obtain a deficiency judgment against a seller after the completion of a short sale.
The bill was signed by Governor Schwarzenegger on September 30. Briefly, it states that if a lender provides written consent to a short sale on a first mortgage, the lender must accept the sales proceeds as full payment and discharge the remaining balance due on the loan. In other words, lenders are prohibited from pursuing sellers on all first mortgages in California after a short sale.
With so many homeowners today struggling with their mortgage payment, short sales have become a prominent alternative to foreclosure. A short sale is when the amount owed to the lender is more than the home can be sold for and the lender agrees to let the home be sold “short” of the amount owed. Currently banks considered short sale sellers to be in default and could pursue a deficiency judgment for the balance due.
The new law only applies to mortgages in the first lien position; however, it’s unclear what the law is with regard to refinancing. It seems to come down to the interpretation of the status of the loan (i.e. a recourse loan), and at the head of all the confusion on this issue is Bank of America that believes they have a legal right for a deficiency judgment on refinanced short sales. While SB931 may not have gone far enough on this particular point, the verbiage is quite clear that lenders can seek damages for fraud or waste by the borrower.
The New Year is already starting out right. The passage of SB 931 restores a homeowner’s dignity and credit standings during these tough financial hardships. Moreover, there are many homeowners who can now sleep better at nights without the worry of whether or not they’ll be served with a deficiency judgment.
If you have a question about your transaction, give us a call or post your question. We love to hear from you.