Breaking News: SB 931 Bans Deficiency on California First Mortgages After a Short Sale

In the most exciting news since Pop Cap introduced Peggle, it's possible that California short sale sellers with a first mortgage may no longer have to worry about a deficiency judgment after a short sale. I've been following SB 931 with great interest and discovered it just passed the Senate on Thursday unopposed. It's already cleared the Assembly.

California sellers who are granted a short sale by a lender holding a first mortgage will now be exempt from a deficiency judgment, even if that first mortgage was a hard money loan, providing that Governor Schwarzenegger signs it. And why wouldn't he? Nobody at the Capitol seems to have opposed it.

I can't count the number of Bank of America short sales I have negotiated and closed in Sacramento in which sellers had refinanced into one loan at some point. Bank of America has been unrelenting in its short sale approval letter verbiage on refinances, saying it would follow state laws to pursue a deficiency judgment. Some California lawyers argue that even if the loan was purchase money and exempt from a deficiency, such language allowed the bank to pursue sellers after closing a short sale because the approval letter changed the status of the loan.

On a refinance, though, the law is jumbled. It says if the bank forecloses on a first mortgage under a Notice of Default, it waives the right to a deficiency. However, it doesn't address what happens after a short sale. Short sales are different from foreclosures. Lawyers say a bank would need to pursue action most likely through an appellate court, and it's too costly, but it doesn't mean a bank wouldn't do it.

Now that we have SB 931 on the horizon, all of that is likely to change. Change is good. As a Sacramento short sale agent, I have clients who can't sleep at night because they have refinanced and closed escrow on a short sale. They are always looking over their shoulder, wondering whether they will get served with a collection notice or lawsuit.

SB 931 applies to one to four-unit dwellings, non-owner or owner-occupied. You can thank Sen. Denise Ducheny, a San Diego Democrat, for SB 931.

Illustration: Big Stock Photo

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Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout Sacramento. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. DRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available through bookstores everywhere and at Amazon.com.

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.