Lawyers sometimes tell potential short sale sellers that a foreclosure or a bankruptcy offers better protection for the homeowner than a short sale. These guys favor foreclosures over short sales. I wonder if these same lawyers are those who don't know how to get paid to negotiate a short sale. Because the California lawyers I know who negotiate short sales get the deficiency language removed for purchase money loans. That makes a short sale better than a foreclosure. And so far, lawyers tell me that first mortgage lenders who have the right of recourse have not yet filed suit in an appellate court but it doesn't mean they couldn't.
Now, SB 931 will exempt all first mortgages, hard-money or purchase money, from a deficiency after a short sale as well. It prohibits deficiency judgments on a property secured by a first trust deed for a dwelling of 1 to 4 units. Every potential short sale seller with a refinanced first mortgage should be screaming for joy right now. Well, unless for some reason Governor Schwarzenegger doesn't sign it.
More Articles by Elizabeth Weintraub:
- Differences Between a Short Sale and a Foreclosure
- Can We Do a Strategic Short Sale Without a Hardship?
- Tips for Buying Short Sales and Foreclosures
Technorati tag: Senate Bill 931 SB 931
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
Comments
It might be nice to have this bill become law, but don’t think that some bank or lender will not challenge it in court. They will argue that the loan was not made under these circumstances, and that it would only affect loans made after passage.
It is easy to get the wording removed on a purchase money loan, and I am not sure that even if it was not removed, that the lender could proceed with a deficiency judgment after a short sale. It isn’t even that hard with a recourse first mortgage, because they would need to go through the judicial foreclosure process in order to obtain a deficiency judgment. It is the non-purchase money seconds that are the real problem.
What a joke! I work two jobs to pay for my home and now people can just walk away with no accoutability. What’s next, new cars? People buy cars every day and as soon as they drive off the lot, the car is not worth the purchased value. Why is it different here yet we still buy cars. The good thing about it is that home values will keep going down which means less property tax money to the state. Maybe our state and the oversized government will feel different when the state goes BK.
Good for you Hector ! Go ahead and put yourself in a early grave, not see your kids grow up,have time with your wife all because you are pursuing what has become the American nightmare instead of dream.
Does this bill cover the short sales that happened before Jan 1st 2010 ?
SB 931 was signed by the governor. It applies to short sales that close after January 1, 2011.
What impact does this have if any on second mortgages. Bank of America is our second and the loan is $140,000. Our first is getting $100,000 less than loan so there is nothing left for B of A.
BofA says they want $27,000 from us to dismiss the definiency judgment.
Well, the good news is SB 931 did pass and it is effective January 1, 2011. However, the bad news is it won’t help your situation because it pertains only to first mortgages, not to second loans.
Undoubtedly, in your situation, the first lender is paying the second lender something like $3,000. You should continue to negotiate with the second lender and follow your real estate agent’s and lawyer’s advice.
In California, a second lender could have deficiency rights in a foreclosure, depending on certain circumstances, so you may want to obtain legal advice now.
I have a piece of land I bought to build on in L.A. It is upside down. Will this bill apply to a piece of land with a construction loan that could go in to default?
SB 931 appears to apply to dwellings and not just land, sorry. 1 to 4 units only.
Any more insights on 2nd mortgage situations?
I have about 90K worth on my 2nd loan with Green Tree for a property in Los Angeles.
The home was purchased for 470K and is currently worth about 300K. The first loan is for about 370K so clearly the short sale won’t cover even the first loan, let alone 2nd.
What are the general tendencies of 2nd mortgage banks in these types of situations? Are they likely to pursue deficiency judgments since they’re clearly left out in the cold for the entire loan balance?
While I can’t give you legal advice, I can tell you that your second lender may have recourse after a short sale and, if it’s a hard money loan, after a foreclosure. What they generally do in a short sale is settle, but without a release of personal liability, they could retain the right to go after you.
In a short sale, the first lender gives some of the proceeds to the second lender — outside of HAFA and a few other lenders — that amount is generally about $3,000. Sometimes in a short sale the second lender will also ask the seller to make a contribution. The request is generally not for the entire amount, thank goodness. Before you attempt a short sale, you should get legal advice.
I live in California since 2007. I worked here on and of since 2002 and in 2005 I remortgaged (1st) and signed the mortgage with Indymac out here.
The house closed in a short sale Feb 2 2011 (after the law passed), BUT house was in Florida!
Since I reside in California, does the California deficicency Judgement law protect me?
Indymac stated in a letter that they have the right to go afeter me for a judgenment. Doesn’t make sense with the new law and I cannot seem to get a clear answer.
Thanks
Joe
Since the home is in Florida, you are subject to Florida laws. Sorry.
I have a couple of duplexes in Fresno that are currently underwater. The loans which are both 5yr ARMs recast in February 2012. I made a 20% downpayment on both of them when I made the purchase 6 years ago. It is my understanding that in a short sale if the unit is underwater the borrower in most cases would be made liable by the lender for the difference between the sale price and the amount of the loan as a condition by the lender for the short sale to close. So how would the ’short sale’ close assuming the above is correct.
Whether a seller in a short sale is responsible for the difference between the sales price and the amount owed depends on your state laws and the type of loan. Most of the short sales I do, the sellers are released from liability.
According to CA Civil Code 580e, if you have a first mortgage and the lender agrees to a short sale, that debt is gone and the bank cannot pursue you. But do get legal advice.
I have heard that this law may become retroactive, is there any chance of that? My husband’s house short sold in 2010.
Does 580E also apply to 2nd homes? How about owner-occupied properties that are converted to rentals?
The bill is not retroactive. It commences January 1, 2011. It applies to 1 to 4 units and does not specify that the property must be owner occupied. For more information, please consult with a real estate lawyer.
what happens if they subsequently repeal this law? if your dwelling is refinanced while this law is in effect, do you retain the anti-deficiency protection?
That’s what I’m worried about. I can’t imagine that this won’t get challenged. After that date, all bets are off.
Does the current law concerning a 1st lien apply to purchase and or refinanced 1st?
It applies to all first mortgages, regardless of whether they are purchase money or hard money. It applies only to short sales. It does not apply to foreclosures or second loans.
Elizabeth… thanks for all the great responses.
I’m in Ca., and trying to short sell. May have to walk away.
Have first and second mortgages. First is still original loan. Second I refinanced just for rate and terms, no money out, just the refi fees were added. So even the second is basically all original purchase money. Is the second subject to deficiency judgment?
While I cannot give you legal advice, I think I’m fairly safe in saying a refinance of a second loan, even if just for rate and term, is still a hard-money loan and subject to deficiency laws. There is a new bill in the works at the Capitol that would cover rate and term refis for second loans. It didn’t pass last year but maybe it will this year? Keep your eye on SB 458.
So I currently own a condo I want to do a short sale for here in California. It was originally bought as an owner occupied unit and I’ve lived there for about for years before I started renting the place out. I have a rental duplex I also own and is planning to purchase a new home for me and my wife to live as our primary home. My question is can the banks still go aftery assets such as my primary home or rental property duplex?
Some people may disagree with this statement, Hung Nguyen, but we don’t live in a police state. A bank can’t seize assets that are not security for the loan without your permission. However, you probably will not be able to buy another home for at least 2 years if you short sale. If you don’t short sale, you still might not be able to because you are underwater. You should talk to a lender first to see if you qualify to own a new home plus an underwater home at the same time.
Hi Elizabeth, so if I have a first loan of $486k from BofA and a 2nd loan of $139k from Chase (this is a HELOC) both used to purchase a condo in CA, under this CA law, ONLY the first loan from BofA is protected from Deficiency Judgement? Sorry if this is redundant, but just want to make sure I understood your explanation above.
thank you.
SB 931 pertains to first mortgages. However, a new law just passed last month that pertains to all mortgages in a short sale. It’s called SB 458:
http://homebuying.about.com/b/2011/07/22/new-law-passed-prohibits-deficiencies-on-california-short-sales.htm
Thanks for the clarification Elizabeth. You are so helpful – thank you. My condo is a loft within a 18 unit bldg. Does it still qualify or does it pertain to only 1-4 unit dwellings?
A single family condo is a 1 to 4 unit.
Thank you. Is SB 931 and SB 458 only apply to short sales only and not foreclosures?
Hello Alex: Yes, both of these bills apply only to short sales. Not to foreclosures.
Hi Elizabeth We are nearing our short sale in Long Beach with a deficiency of 25k on the first and 75k HELOC with same lender. Lender evades issues we raised on the following: What happens after the short sale is closed? We believe that they’ll issue a 1099 to us for a now unspecified amount. In addition, we understand the amount that is owed on the on both the mortgage and HELOC will be paid in full at the time of closing. They will then make an entry on our credit report that shows the short sale and the amount that was owed on the HELOC. We would like the question answered, “Is the Credit Union going to sell the HELOC to a third party collection agency or simply discharge the amount when the sale is closed? Elizabeth, our aim is to be able to borrow again and thus we need the existing loans zeroed out after the short sale with no danger of the selling the notes to a collector. And thank you for your help!
You need a lawyer. I can tell you this, I would not advise a client to close escrow who did not know the answer to your question. Almost every lender will issue a 1099 — that’s not the problem.