Specifically, Section 580e 2b reads, "A holder of a note shall not require the trustor, mortgagor or maker of the note to pay any additional compensation, aside from the proceeds of sale, in exchange for the written consent to the sale."
Main Provisions of SB 458 for a California Short Sale
Far as I am concerned, we did not need SB 458 in California. We had SB 931, which did everything we needed it to do. SB 931 removed the right of a bank to pursue the seller after a short sale -- providing the home was 1 to 4 units, there was no mortgage fraud, and the loan was in first position.
Then, SB 458 was passed by Governor Jerry Brown on July 15, 2011. The two keys points in SB 458, which amended CA Civil Code 580e, affects loans in second position but it pertains to all loans. It prevents:
- The right of a bank to pursue a deficiency judgment after a short sale, and
- A bank demanding a seller contribution as a condition of approval.
However, it does not prevent the seller from voluntarily offering the bank a contribution. A seller is permitted to participate in the bank's loss by offering to offset that loss, as long as it is not a condition of short sale approval, say C.A.R. lawyers.
Before SB 458, we could negotiate a release of the seller from becoming a bank's hostage through a seller contribution. But SB 458 stripped that right away from us, forcing all negotiations to the front end of a short sale. Now, we have to guess what banks want, and that lessens our negotiation power.
Title Companies and SB 458
California title and escrow companies worry that a lawsuit or some other related problem could prevent the short sale bank from issuing a reconveyance or otherwise holding the title or escrow company responsible for compliance with SB 458 through preparation of the closing statement.
As a result, some title companies send a release of liability statement to the short sale bank for signature. Although, I suspect the banks do not sign such a form, at least it puts the bank on notice that should it later be determined that the bank violated CA Civil Code 580e, the title / escrow company is not liable.
Short Sale Banks and SB 458
The way to comply with SB 458, say some lawyers, is to make an offer to the bank in advance of negotiations. This works particularly well when the bank does not want to approve a short sale because the seller does not have a financial hardship. Some banks routinely approve a strategic short sale and some do not.
However, in many cases, it is not always the bank that makes the final decision. It is often the investors who actually own the note who make the decision. The investors could be the bank itself or it could be a pool of private investors or even another competing bank.
I had one bank outright reject a client's short sale. The reason given for rejection was the seller did not have a hardship, and the seller could afford to make the monthly payments. The bank closed the file. The bank did not request a seller contribution.
In truth, the seller could afford to make the mortgage payments but chose not to. Because the seller had not made any payments for 6 months, the seller had 6 months worth of payments to contribute. I pointed out specific benefits to the bank to agree to do the short sale such as:
- The seller was trying to do the right thing by bringing the bank an offer from a fully qualified buyer, and the offer was at market value.
- The seller could have elected to walk away from the home months ago but chose instead to pursue a short sale.
- The seller was willing to make a strong financial contribution to offset the bank's loss.
- If the bank did not agree to the short sale, it could not recover any money from the seller because both the first and second loans were purchase money. CA Civil Code 580b disallows deficiency judgments for purchase money loans. The bank would get nothing if it chose to reject the short sale because the seller would choose foreclosure in that event.
The bank opened the file, approved the HUD, the purchase offer and the seller contribution.
Note to the reader: In your situation, I would get legal advice because it appears the bank demanded a contribution as a condition of short sale approval, which is very different than the seller offering out of the blue to give the bank some money. Of course, I cannot give you legal advice, but I can say that when you talk with your lawyer, ask about filing a suit in Small Claim's Court. Not only is the burden of proof a bit different than our Apellate court, but it's less expensive and your damages fall under its threshold limit.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
