California's Short Sale Anti-Deficiency Law, SB 931, Takes Effect January 1, 2011

By
Real Estate Agent with Lyon Real Estate BRE #00697006

SB 931 california anti deficiency law short salesBecause today is Dec 31, 2010, most County Recorder's offices are closed throughout California, although, I can't imagine any Sacramento short sale seller wanting to close at the end of December with SB 931 positioned on the horizon. SB 931 is the anti-deficiency law passed in California that says when a lender in first position agrees to a short sale, it cannot pursue the seller for a deficiency judgment. It does not apply to foreclosures.

I'm working on 3 Bank of America short sales at the moment, all of which were scheduled to close this week. In 2 of these short sales, the bank has refused to submit a letter releasing liability. In the 3rd Sacramento short sale, Bank of America issued an amendment to the original short sale letter releasing the seller from liability by removing the deficiency language from its approval letter, but then failed to mention this release in a subsequent extension.

The answer? Roll all 3 into January. Get extensions from Bank of America. Yeah, it's a little disappointing for the buyers who had hoped to be in their new homes by New Year's Eve, but it's better this way, most likely, for everybody.

One of my sellers scoffed when I suggested that Bank of America may have given us the extension because it might not realize that SB 931 is going into effect on January 1. But then I received an email this morning from Bank of America that confirmed my suspicions. SB 931 is probably not yet a priority to Bank of America. But it will be.

Some lawyers have argued that SB 931 is unconstitutional and will be challenged. But at the moment, any seller who has only a first mortgage (hard money or purchase money, makes no difference) and who petitions the bank for a short sale in California next month, should fall under the protection of SB 931, if the bank approves the short sale.

2011 will surely be a bumpy ride. Check out my real estate predictions for 2011.

Happy New Year from your Sacramento short sale agent. While everybody else is toasting with champagne to the New Year, I'll be toasting to SB 931.

Photo: Big Stock Photo

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Elizabeth Weintraub is an author, home buying expert for About.com, a Land Park resident, and a veteran real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento, as well as tract homes in Elk Grove, Natomas, Roseville and Lincoln. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout the four-county Sacramento area with an emphasis on Elk Grove. Call Elizabeth Weintraub at 916.233.6759. Put 40 years of real estate experience to work for you. Broker-Associate at Lyon Real Estate. BRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available with free shipping.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.The views expressed herein are Weintraub's personal views and do not reflect the views of Lyon Real Estate. Disclaimer: If this post contains a listing, information is deemed reliable as of the date it was written. After that date, the listing may be sold, listed by another brokerage, canceled, pending or taken temporarily off the market, and the price could change without notice; it could blow up, explode or vanish. To find out the present status of any listing, please go to elizabethweintraub.com.

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Karen Fiddler, Broker/Owner 01/01/2011 03:52 AM
  2. Doug Anderson 01/01/2011 05:00 AM
  3. Vickie Nagy 01/01/2011 05:16 AM
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Rainmaker
1,253,247
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Elizabeth, I had the same question has Jason (#8) whether it will slow down the short sale approval rate. Keep us posted. Thanks.

Jan 01, 2011 01:13 AM #10
Rainmaker
199,601
Dave Rosenmarkle
Highland Realty - Arlington, VA

California tends to start a fair number of trends and changes in the industry. I hope this one sticks.

Jan 01, 2011 01:39 AM #11
Rainmaker
60,893
Susan Hamblen
Exit Realty Achieve - Smithtown, NY
Making the world a happier place...one client, one

Wow...interesting information and will be even more interesting to see how it affects timing in the short sale process. Keep us posted and let us know how this changes many of the dynamics.

Jan 01, 2011 01:49 AM #12
Rainmaker
1,842,254
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Hey Myrl: I am back from vacation, bright eyed and bushy tailed.

Hi Steve: I hope SB 931 does speed up the process but it might also slow it down as banks say, "What the heck? How did California pass such a law?"

Hi Tni: Requesting and receiving extensions from Bank of America to push the short sale status into 2011 seemed like the answer. Even if it's not, we had nothing to lose by trying. Because it's possible that once the bank realizes it must release the sellers, it might deny the short sale.

Jason and Michael: It's hard to predict. We haven't dealt with something like this before. If it's possible to get a release of liability, I generally get it. Out of the other 4 short sales I closed in December, 3 of those carried a full release of liability -- no deficiency judgment. The 4th Sacramento short sale had a hard-money first, which released the seller, but it also had a second with a credit union. That particular credit union told us upfront it would negotiate only after the short sale, and the seller was comfortable, so we closed. Because SB 931 would not have helped that seller with the second. It applies only to first mortgages.

Hi Susan: I'm thinking the first couple of months of short sales in 2011 will result in an automatic release of liability. As the year goes on, I imagine the banks will find a way to get around SB 931 or they will challenge it in court. So California sellers who are contemplating a short sale should probably begin that process right away and not wait for summer.

Jan 01, 2011 03:19 AM #13
Rainmaker
462,849
Marcy Moyer
eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales - Mountain View, CA
CDPE

Elizabeth, that is great advice about doing the short sale now in case the law is challenged in the future.

Jan 01, 2011 03:33 AM #14
Rainer
387,259
Doug Anderson
Tucker Associates Real Estate Services - Danville, CA
Bay Area Real Estate Views

Elizabeth - Let's us hope that this law will not eventually be overturned. It will certainly provide relief to short sale clients and allow them to "close the door" upon the sale of their residence without the worry of repercussions on the deficiency. Happy New Year. ~ Doug

Jan 01, 2011 04:54 AM #15
Rainmaker
279,019
Ken Patterson
TPR Properties - Rocklin, CA
Roseville Real Estate, TOP Rocklin Realtor

Another very good one!!!  Thanks for the reminder and keeping us all sharp!  Happy New Year~!

Jan 01, 2011 05:15 AM #16
Rainmaker
1,400,214
Vickie Nagy
Vickie Nagy, Broker Associate Alta Realty Group | BRE#01363932 - Palm Springs, CA
Delivering Desert Living, Year-Round Golf, Tennisl

Elizabeth, you are so on target with this post...and with your last comment that you expect the banks will find a way to work around SB 931. I too think it's a limited window of opportunity.

Jan 01, 2011 05:17 AM #17
Rainmaker
1,342,525
Bill Burchard
3B Realty: 951-347-3818, CA - Murrieta, CA
Broker, Realtor, Representing Buyers and Sellers

Hi Elizabeth. It seems a prudent move to postpone the closings to 2011. I hope your client’s appreciate what you’ve done for them.

Jan 01, 2011 05:31 AM #18
Ambassador
1,396,226
Erica Ramus
Erica Ramus - Ramus Realty Group - Pottsville, PA - Pottsville, PA
MRE, Schuylkill County PA Real Estate

I have not heard of this new law. Good luck with closing your short sales this week!

Jan 01, 2011 08:21 AM #19
Rainmaker
1,756,945
John Novak
Keller Williams Realty The Marketplace - Las Vegas, NV
Henderson, Las Vegas and Summerlin Real Estate

A good law for consumers, but still has that one pesky sticking point ... "if the bank approves the short sale." At least it's a step in the right direction.

Jan 01, 2011 10:41 AM #20
Ambassador
620,375
Roland Woodworth
Q Realty - Clarksville, TN
Q Realty - Power In Real Estate

Thanks for keeping us up to  date on these things. Who knows if it will come this way

Jan 01, 2011 01:34 PM #21
Rainer
13,246
Tammy Fertig
RE eBrokers - Riverside, CA

Thanks for the info Elizabeth!  Lenders will still be able to issue a 1099 on the deficiency, correct?

Jan 01, 2011 02:33 PM #22
Ambassador
1,995,844
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Elizabeth - This is an important item for short sale agents and the sellers to be aware of.  It won't cover all issues, but it will help.

Jan 01, 2011 05:56 PM #23
Rainer
24,607
Trent Chapman
Keller Williams -New Future Team - San Marcos, CA

@Steve, most likely your State won't follow in the steps of CA on this one, unless your State has a similar "one action rule".  This was basically a clarifying law that was written to make it so that banks could no longer have their cake and eat it too.  You see, if a bank does a Trustee Sale in CA as the first lien position, they have taken their one action and have elected not to pursue a judicial foreclosure and sue the borrower for the deficiency balance.  BUT, with short sales, they were getting a net return that is higher than foreclosure, PLUS they were maintaining the right to collect (if a naive agent advised the borrower to sign a short sale approval that opened them up to more liability than had they let it foreclose).

Bank of America, along with most every other lender, hasn't been too hard to get a full release of lien/liability in the first position (speaking of CA) for the past year.  Usually they only hold out on giving a release of liability in the second lien position, here in California. 

I did a short sale recently which had two BAC loans (both were cash-out refinanced loans... i.e. considered recourse loans in CA) and the first loan approval letter gave a full release of liability, but the second loan approval was only for a relase of lien.  I advised my seller that there wasn't much benefit for her over just letting the home foreclose and that in fact, in her case, a foreclosure would be better for her based on 1992 CA case law Simon vs Superior Court, unless Bank of America agreed to release liability for both liens, since they were not proceeding with a judicial foreclosure and all her assets were in protected accounts anyway. 

It took almost 3 extra weeks to get the wording changed, but in the end, BAC legal saw that they had to release liability in order to close this short sale and to net $38K more than their estimated foreclosure net return. 

SB 931 helps with first liens, but does nothing with regards to second liens, which as I mentioned, have been the problem.  Getting a full release of liability on a first lien in CA has been a cake walk due to CA CC 580d (one action rule).  Unless they are pursuing a judicial foreclosure, CA short sales should have always been easy to get a full release in the first lien position (it's important to know your specific State laws or have a good attorney to help you so you know when to push back on the bank and when you've done your best for your client).

Happy New Year everyone!

Trent

www.TheShortSaleGenius.com

Jan 01, 2011 06:48 PM #24
Rainmaker
1,842,254
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Hey Trent: You can quote C.C.P. 580d all you want to the banks, but especially Bank of America has been stubborn lately. Maybe you aren't dealing with very many hard-money cash-out refinance first mortgages -- because I've had no problem with liability releases on BAC or B of A purchase money firsts, but the hard-money first-position loans have been a different story. It's been a real struggle. And if you throw MI on top of it, watch out.

Jan 02, 2011 03:41 AM #25
Rainer
24,607
Trent Chapman
Keller Williams -New Future Team - San Marcos, CA

The BAC deal that I mentioned, that took 3 weeks to remove the verbiage, was a cash out refi.  Through Equator, I was denied 3 times the request to remove the verbiage as the employees don't understand legal stuff and just ignore it.   So, I went to Crystal D at BAC and after 2-3 weeks of going back and forth, she finally changed it... 24 hours after my 4th 'denial' came through Equator when she got her approval from legal.  My point isn't that it will happen on your first request, but that it is an easy argument as long as you get your message to the right person... not through Equator.

Trent

www.TheShortSaleGenius.com

Jan 03, 2011 06:33 AM #26
Rainmaker
1,842,254
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

I ask them to take it to legal in the first place, so that's dramatically decreased my waiting time. I've also been lucky, I suppose, that most of the negotiators I've dealt with at Bank of America have been pretty bright.

Jan 03, 2011 02:02 PM #27
Rainer
7,634
Ken Lee
Keller Williams Realty - Danville CA - San Ramon, CA

Hi Elizabth.  I realize this may no longer be an issue for you now that we are in 2011, but regarding your comment ...

"Bank of America issued an amendment to the original short sale letter releasing the seller from liability by removing the deficiency language from its approval letter"

Please be very careful.  When deficiency language is removed form one letter to the next, this does not necessarily mean a bank is giving up their original rights.  All they may be doing is removing language reiterating their rights to pursue a deficiency.  You probably need NEW proactive language on the part of the bank stating there will be no deficiency.  And then you should probably recommend the Seller run the language by an attorney to be confident in moving forward.

Jan 04, 2011 08:39 AM #28
Rainer
24,607
Trent Chapman
Keller Williams -New Future Team - San Marcos, CA

@Ken, you make a good point.  Always have the client run it by their attorney.  However, I would not be so concerned about it if I have both the original approval stored in my file with the final approval with the language removed.  This serves as an argumental point if they ever do go to court: "Your honor, I refused to do the short sale unless the bank agreed to release me of liability and then they came back with this updated approval letter with the language removed.  Here you can see the original approval and the final approval."

Sure, it's not as strong as getting wording that states they will release the seller of all future liability, but a judge will most likely side with the consumer on this one as it was the intent of the contract.

Trent

www.ShortSaleGenius.com

Jan 04, 2011 08:55 AM #29
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