SB 931 Bill Passed by the California State Senate on August 23rd which provides Short Sale Deficiency Protection for First Mortgages in a short sale transaction was signed by the Governor on September 30th and will become effective for transactions after January 1, 2011.
The legislative counsel's summary of the bill follows:
"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 (owner) 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. "
Existing law prevents a lender who has made a purchase money mortgage ( a loan used to purchase a home , not a refinance ), from pursuing a deficiency judgment after foreclosure. In a short sale, however, some attorneys have been concerned that this protection may not extend to a seller in a short sale where the lender does not expressly relieve the seller from a potential deficiency judgment even if the loan was a purchase money mortgage. This law would eliminate this ambiguity in the law. This law would also apply not only just for purchase money mortgages, but for "hard money loans" which are first mortgage loans not used to originally purchase the home, such as a refinance.
This law would not change existing law relating to second mortgages in a short sale, so it still remains very important for sellers to obtain written relief from future deficiency judgments from second mortgage lenders in a short sale. Many attorneys still believe, however, that if a second mortgage was also a purchase money mortgage used to initially purchase the home, that the second loan would also still be non-recourse after a short sale, but there has not been definitive case law confirming this.
The above information is provided for educational purposes only and is not intended to be definitive legal advice. The specific facts of a case can have significant impact . Anyone going through a short sale or foreclosure should obtain legal counsel from a licensed real estate attorney.