Short sales continue to dominate the real estate market, as consumers are becoming more aware of their options when it comes to falling behind on their mortgage payments and the inability to afford the mortgage. One of the most common questions that I'm asked during a consultation with distressed owners is "can the bank come back after me for the unpaid & forgiven balance (deficiency judgment) after the short sale is completed?" Most of the time, these home owners have tried to borrow money to maintain the loan or tried to work out a loan modification with the bank. When all fails, and the stress becomes too much, short sale is an option that can open the door for the home owners to a new chapter of their life. So, they want to know that with the completion of a short sale, they will never have to hear or deal with the lender ever again.
My practice has always been to disclose and share as much information as I can. So, with a short sale transaction, except under certain circumstances, the lender may demand the balance still owed on the note that the transaction did not cover. For example, the home owner's loan balance is $350,000, but the sale price approved on the short sale is $200,000; the lender can demand the deficiency difference of $150,000.
With the new law (SB931) that went into effect January 1, 2011, after the short sale of a residential property of 1-4 units, the holder of the first deed of trust (first mortgage/lender) CANNOT pursue the homeowner for any deficiency judgment under the note. If the lender issues an approval letter, consenting the short sale in writing, the lender is obligated to accept the short sale proceeds as payment in full. The borrower is protected even if the loan is refinanced as long as it is secured by a first deed of trust. (Cal. Code Civ. Proc. § 580e (a).)
The law does NOT apply to junior deeds of trust (2nd and 3rd mortgage). Therefore, the homeowner may still be liable for the deficiency balance on those loans. An exception to this new law is when the homeowner has committed fraud with respect to the sale of the property or has committed 'waste' of the real property (damaging the property). (Cal. Code Civ. Proc. § 580e (b)) Additionally, SB 931 doesn't apply if the borrower is a corporation or political subdivision of the state (Cal. Code Civ. Proc. § 580e (c)).
With the new law, the homeowners now can have more assurance that the first lenders now will not be coming after them for deficiency judgment upon completion of the short sale. In my practice, even before the law went into effect, I always try to negotiate on behalf of clients-sellers of a no-deficiency-judgment clause as part of the conditions of approval. Fortunately, to this date, I have been successful in obtaining this for my short sale clients.
If you or anyone you know needs some consultation of how to navigate in the short sale world, I'll be glad to help.
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