California Short Sale Deficiency Bill

Senate Bill 931, which will provide Short Sale Deficiency Protection in the state of California, goes into effect January 1, 2011.  The new law states that existing lenders of record who have approved and agreed upon a short sale will not be able to obtain a deficiency judgment against the seller after the short sale is completed.   After providing written consent to a short sale on a first mortgage or first deed of trust, the lender must accept the proceeds of the sale as full payment and must fully dismiss the remaining balance due on the loan.   This law applies only to first mortgage loans secured by one to four residential units.  However, this law would not apply if the lender is seeking damages for fraud or waste by the borrower.

Section 580e of the bill reads:

(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor 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. 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.

(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.