CALIFORNIA BANS DEFICIENCY JUDGMENTS IN SHORT SALES (WELL... AT LEAST FOR FIRST LIENS)
By Derik N. Lewis, Esq.
If Governor Schwarzenegger signs SB 931 before September 30, 2010, it will add section 580e to the Code of Civil Procedure which will prohibit first
mortgage holders from seeking a deficiency judgment in any transaction where they have provided written consent to a short sale. This would add
significant protections to California’s current anti-deficiency laws (e.g. CCP 726, 580d and 580b) when dealing with short sale transactions.
This new law would provide far more relevant protections for borrowers seeking a short sale than the protections promised by another law awaiting the
Governor’s signature, SB 1178. As I stated in a prior post, SB 1178 would expand the purchase-money protections of CCP 580b to any refinancing of the
original purchase-money loan but NOT to any amount taken out in cash from such refinancing. Additionally, 580e would apply directly to short sale
transactions. Therefore, the new 580e is the saving grace for those borrowers seeking a short sale with a cash-out refinance loan.
Although this is great news for all of us working to help financially troubled homeowners, don’t break out the Champagne glasses just yet. Serious
questions remain about how this new law will be implemented and interpreted. For instance, can the borrower waive the protections afforded by 580e?
What happens if the lender keeps the language in the approval letter reserving the right to seek a deficiency? Is that considered a waiver of 580e?
What if the lender asks for, and the borrower signs, a new promissory note? These issues will not be resolved any time soon. Therefore, real estate
agents and lawyers alike should be very cautious in giving advice about the implication of both the new 580e and the revised 580b (if the bills are
signed into law). What we can do is use the new law as significant leverage against the first lien holder to force the complete REMOVAL of the
deficiency language from the approval letters.
What the legislature has yet to address is the second lien issue. These laws have no effect on second lien holders (lenders and other creditors alike).
As we all know, the second lien holder can be far more troublesome than the first… this new law will not affect them in any way. As all lenders become
more and more aggressive, we will need some leverage against the second lien holders. Until then, we will need to keep fighting back against their
unreasonable demands.
The LEGISLATIVE COUNSEL'S DIGEST for the new law reads as follows:
Existing law authorizes an action for a deficiency judgment for the balance due upon an obligation for the payment of which a
deed of trust or mortgage with power of sale upon real property or any interest therein was given as security, as specified. Existing law prohibits
a deficiency judgment in any case in which the real property or an estate for years therein has been sold by the mortgagee or trustee under power
of sale contained in the mortgage or deed of trust.
This bill would prohibit a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of
not more than 4 units in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due
at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. The bill would provide that written
consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full
payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage. The bill would specify that
those provisions would not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and
remedies against the trustor or mortgagor or any 3rd party for fraud or waste if the trustor or mortgagor commits either fraud with respect to the
sale of, or waste with respect to, the real property that secures that deed of trust or mortgage. The bill would make these provisions inapplicable
if the trustor or mortgagor is a corporation or political subdivision of the state.
The new section 580e would read as follows
:
580e.
(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or
first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the
remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first
mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale
proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.
(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect
to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the
first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party
for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of
the state.
ABOUT THE AUTHOR:
Derik N. Lewis is a California real estate attorney and real estate broker. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some
of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners find
successful alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced short sale attorney by
contacting Derik at dlewis@dlewislaw.net or (949) 648-7836.
Blog: http://activerain.com/blogs/deriklewis
Website: www.LawyersRealtyGroup.com
Email: dlewis@dlewislaw.net
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