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California's Short Sale Anti-Deficiency Law, SB 931, Takes Effect January 1, 2011

By Elizabeth Weintraub Sacramento Broker

Real Estate Agent with Elizabeth Anne Weintraub, Broker DRE #00697006

December 31, 2010 03:49 AM

Because today is Dec 31, 2010, most County Recorder's offices are closed throughout California, although, I can't imagine any Sacramento short sale seller wanting to close at the end of December with SB 931 positioned on the horizon. SB 931 is the anti-deficiency law passed in California that says when a lender in first position agrees to a short sale, it cannot pursue the seller for a deficiency judgment. It does not apply to foreclosures.

I'm working on 3 Bank of America short sales at the moment, all of which were scheduled to close this week. In 2 of these short sales, the bank has refused to submit a letter releasing liability. In the 3rd Sacramento short sale, Bank of America issued an amendment to the original short sale letter releasing the seller from liability by removing the deficiency language from its approval letter, but then failed to mention this release in a subsequent extension.

The answer? Roll all 3 into January. Get extensions from Bank of America. Yeah, it's a little disappointing for the buyers who had hoped to be in their new homes by New Year's Eve, but it's better this way, most likely, for everybody.

One of my sellers scoffed when I suggested that Bank of America may have given us the extension because it might not realize that SB 931 is going into effect on January 1. But then I received an email this morning from Bank of America that confirmed my suspicions. SB 931 is probably not yet a priority to Bank of America. But it will be.

Some lawyers have argued that SB 931 is unconstitutional and will be challenged. But at the moment, any seller who has only a first mortgage (hard money or purchase money, makes no difference) and who petitions the bank for a short sale in California next month, should fall under the protection of SB 931, if the bank approves the short sale.

2011 will surely be a bumpy ride. Check out my real estate predictions for 2011.

Happy New Year from your Sacramento short sale agent. While everybody else is toasting with champagne to the New Year, I'll be toasting to SB 931.

Photo: Big Stock Photo

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Fernando Herboso - Associate Broker MD, & VA

Maxus Realty Group of Samson Properties - Clarksburg, MD

301-246-0001 Serving Maryland, DC and Northern VA

A little too much fanfare for this one. . I find that the most likely entity to go after a homeowner with a deficiency is the second position. . they lose the most. .

But I'm happy that California took this bold step forward.

Jan 01, 2011 12:58 AM

Michael Setunsky

Woodbridge, VA

Your Commercial Real Estate Link to Northern VA

Elizabeth, I had the same question has Jason (#8) whether it will slow down the short sale approval rate. Keep us posted. Thanks.

Jan 01, 2011 01:13 AM

Dave Rosenmarkle

Highland Realty, Inc - Fairfax, VA

33 years of providing fully satisfying service!

California tends to start a fair number of trends and changes in the industry. I hope this one sticks.

Jan 01, 2011 01:39 AM

Susan Hamblen

Exit Realty Achieve - Smithtown, NY

Making the world a happier place...one client, one

Wow...interesting information and will be even more interesting to see how it affects timing in the short sale process. Keep us posted and let us know how this changes many of the dynamics.

Jan 01, 2011 01:49 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hey Myrl: I am back from vacation, bright eyed and bushy tailed.

Hi Steve: I hope SB 931 does speed up the process but it might also slow it down as banks say, "What the heck? How did California pass such a law?"

Hi Tni: Requesting and receiving extensions from Bank of America to push the short sale status into 2011 seemed like the answer. Even if it's not, we had nothing to lose by trying. Because it's possible that once the bank realizes it must release the sellers, it might deny the short sale.

Jason and Michael: It's hard to predict. We haven't dealt with something like this before. If it's possible to get a release of liability, I generally get it. Out of the other 4 short sales I closed in December, 3 of those carried a full release of liability -- no deficiency judgment. The 4th Sacramento short sale had a hard-money first, which released the seller, but it also had a second with a credit union. That particular credit union told us upfront it would negotiate only after the short sale, and the seller was comfortable, so we closed. Because SB 931 would not have helped that seller with the second. It applies only to first mortgages.

Hi Susan: I'm thinking the first couple of months of short sales in 2011 will result in an automatic release of liability. As the year goes on, I imagine the banks will find a way to get around SB 931 or they will challenge it in court. So California sellers who are contemplating a short sale should probably begin that process right away and not wait for summer.

Jan 01, 2011 03:19 AM

Marcy Moyer

eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales - Mountain View, CA

Probate, Trust, and Investment Specialist

Elizabeth, that is great advice about doing the short sale now in case the law is challenged in the future.

Jan 01, 2011 03:33 AM

Doug Anderson

Tucker Associates Real Estate Services - Danville, CA

Bay Area Real Estate Views

Elizabeth - Let's us hope that this law will not eventually be overturned. It will certainly provide relief to short sale clients and allow them to "close the door" upon the sale of their residence without the worry of repercussions on the deficiency. Happy New Year. ~ Doug

Jan 01, 2011 04:54 AM

Ken Patterson

TPR Properties - Rocklin, CA

Roseville Real Estate, TOP Rocklin Realtor

Another very good one!!! Thanks for the reminder and keeping us all sharp! Happy New Year~!

Jan 01, 2011 05:15 AM

Vickie Nagy

Coldwell Banker Residential Real Estate - Palm Springs, CA

Vickie Jean the Palm Springs Condo Queen

Elizabeth, you are so on target with this post...and with your last comment that you expect the banks will find a way to work around SB 931. I too think it's a limited window of opportunity.

Jan 01, 2011 05:17 AM

Bill Burchard

3B Realty: 951-347-3818, CA - Murrieta, CA

Broker, Realtor, Representing Buyers and Sellers

Hi Elizabeth. It seems a prudent move to postpone the closings to 2011. I hope your client’s appreciate what you’ve done for them.

Jan 01, 2011 05:31 AM

John Novak

Keller Williams Realty The Marketplace - Las Vegas, NV

Henderson, Las Vegas and Summerlin Real Estate

A good law for consumers, but still has that one pesky sticking point ... "if the bank approves the short sale." At least it's a step in the right direction.

Jan 01, 2011 10:41 AM

Roland Woodworth

Blue Cord Realty - Clarksville, TN

Benchmark Realty

Thanks for keeping us up to date on these things. Who knows if it will come this way

Jan 01, 2011 01:34 PM

Tammy Fertig

RE eBrokers - Riverside, CA

Thanks for the info Elizabeth! Lenders will still be able to issue a 1099 on the deficiency, correct?

Jan 01, 2011 02:33 PM

Christine Donovan

Donovan Blatt Realty - Costa Mesa, CA

Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Elizabeth - This is an important item for short sale agents and the sellers to be aware of. It won't cover all issues, but it will help.

Jan 01, 2011 05:56 PM

Trent Chapman

Keller Williams -New Future Team - San Marcos, CA

@Steve, most likely your State won't follow in the steps of CA on this one, unless your State has a similar "one action rule". This was basically a clarifying law that was written to make it so that banks could no longer have their cake and eat it too. You see, if a bank does a Trustee Sale in CA as the first lien position, they have taken their one action and have elected not to pursue a judicial foreclosure and sue the borrower for the deficiency balance. BUT, with short sales, they were getting a net return that is higher than foreclosure, PLUS they were maintaining the right to collect (if a naive agent advised the borrower to sign a short sale approval that opened them up to more liability than had they let it foreclose).

Bank of America, along with most every other lender, hasn't been too hard to get a full release of lien/liability in the first position (speaking of CA) for the past year. Usually they only hold out on giving a release of liability in the second lien position, here in California.

I did a short sale recently which had two BAC loans (both were cash-out refinanced loans... i.e. considered recourse loans in CA) and the first loan approval letter gave a full release of liability, but the second loan approval was only for a relase of lien. I advised my seller that there wasn't much benefit for her over just letting the home foreclose and that in fact, in her case, a foreclosure would be better for her based on 1992 CA case law Simon vs Superior Court, unless Bank of America agreed to release liability for both liens, since they were not proceeding with a judicial foreclosure and all her assets were in protected accounts anyway.

It took almost 3 extra weeks to get the wording changed, but in the end, BAC legal saw that they had to release liability in order to close this short sale and to net $38K more than their estimated foreclosure net return.

SB 931 helps with first liens, but does nothing with regards to second liens, which as I mentioned, have been the problem. Getting a full release of liability on a first lien in CA has been a cake walk due to CA CC 580d (one action rule). Unless they are pursuing a judicial foreclosure, CA short sales should have always been easy to get a full release in the first lien position (it's important to know your specific State laws or have a good attorney to help you so you know when to push back on the bank and when you've done your best for your client).

Happy New Year everyone!

Trent

www.TheShortSaleGenius.com

Jan 01, 2011 06:48 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hey Trent: You can quote C.C.P. 580d all you want to the banks, but especially Bank of America has been stubborn lately. Maybe you aren't dealing with very many hard-money cash-out refinance first mortgages -- because I've had no problem with liability releases on BAC or B of A purchase money firsts, but the hard-money first-position loans have been a different story. It's been a real struggle. And if you throw MI on top of it, watch out.

Jan 02, 2011 03:41 AM

Trent Chapman

Keller Williams -New Future Team - San Marcos, CA

The BAC deal that I mentioned, that took 3 weeks to remove the verbiage, was a cash out refi. Through Equator, I was denied 3 times the request to remove the verbiage as the employees don't understand legal stuff and just ignore it. So, I went to Crystal D at BAC and after 2-3 weeks of going back and forth, she finally changed it... 24 hours after my 4th 'denial' came through Equator when she got her approval from legal. My point isn't that it will happen on your first request, but that it is an easy argument as long as you get your message to the right person... not through Equator.

Trent

www.TheShortSaleGenius.com

Jan 03, 2011 06:33 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

I ask them to take it to legal in the first place, so that's dramatically decreased my waiting time. I've also been lucky, I suppose, that most of the negotiators I've dealt with at Bank of America have been pretty bright.

Jan 03, 2011 02:02 PM

Ken Lee

Keller Williams Realty - Danville CA - San Ramon, CA

Hi Elizabth. I realize this may no longer be an issue for you now that we are in 2011, but regarding your comment ...

"Bank of America issued an amendment to the original short sale letter releasing the seller from liability by removing the deficiency language from its approval letter"

Please be very careful. When deficiency language is removed form one letter to the next, this does not necessarily mean a bank is giving up their original rights. All they may be doing is removing language reiterating their rights to pursue a deficiency. You probably need NEW proactive language on the part of the bank stating there will be no deficiency. And then you should probably recommend the Seller run the language by an attorney to be confident in moving forward.

Jan 04, 2011 08:39 AM

Trent Chapman

Keller Williams -New Future Team - San Marcos, CA

@Ken, you make a good point. Always have the client run it by their attorney. However, I would not be so concerned about it if I have both the original approval stored in my file with the final approval with the language removed. This serves as an argumental point if they ever do go to court: "Your honor, I refused to do the short sale unless the bank agreed to release me of liability and then they came back with this updated approval letter with the language removed. Here you can see the original approval and the final approval."

Sure, it's not as strong as getting wording that states they will release the seller of all future liability, but a judge will most likely side with the consumer on this one as it was the intent of the contract.

Trent

www.ShortSaleGenius.com

Jan 04, 2011 08:55 AM