California Anti Deficiency Law CCP 580e January 2011

This California Law which takes affect  January 2011 is essence reinforces current “anti deficiency” laws on the books under CCP 580b and 580d.

A huge leap forward for “investors” of 1 to 4 units…it does take 580b a step further and protects investor’s and developers that 580b does  not protect.

The bill, SB 931, adds a significant provision to the California anti-deficiency laws which protect California borrowers from deficiency liability on real estate secured obligations. The purpose of SB 931 as expressed by its sponsors is to facilitate “short sales” of distressed residential property and avoid the burdens of foreclosure sales while preserving for the borrower the anti-deficiency protections that are already set forth in Code of Civil Procedure (hereafter “CCP”) Sections 580b and 580d.

SB 931 adopts new CCP 580e which provides that no judgment shall be rendered for any deficiency on a note secured by a first deed of trust encumbering a dwelling of not more than four units in any situation where the trustor sells the dwelling for less than the remaining balance of the secured indebtedness due at the time of sale if the beneficiary under the first deed of trust consents to the sale in writing. The beneficiary’s written consent to the sale will obligate the beneficiary to accept the sale proceeds as full payment of the secured obligation.

The clear intent of SB 931 is to protect an individual in connection with a short sale on his or her residence It is not intended to protect an entity or an individual who is a borrower on a commercial loan secured by one or more consumer residences. This would often be the case where an individual or limited liability company or limited partnership is a borrower on a construction loan to build residential units.

CCP 580e is not limited in its protection to individuals, nor does it require that the residential property sold be occupied by the borrower, nor limit the residential property to only one building (of 1-4 units). Therefore some concerns have been raised that CCP 580e could provide a defense for a real estate developer following consensual sales of the residences constructed for less than the outstanding balance of the construction loan.