I remember April 5, 2010 very clearly. It was a day I had prepared for since the news broke months before. I paid for training classes, earned new designations and read every piece of literature on the subject. I was eager to take this HAFA thing and milk it. I could see myself helping…I mean really helping homeowners avoid foreclosure. One of the HAFA promises was replacing the agonizing, sluggish process short sales had been up that point and streamlining them so that agents like myself could actually close these sales in a decent amount of time. Even though I didn’t think the lenders could pull it off, I was excited at the thought of 14-day(heck 30-day!) short sale approvals. What was really exciting was the ability for homeowners to sell their overleveraged homes without having to worry about the lenders coming back to them with deficiency judgments down the road. Just thinking of having happy buyers and happy selling agents and relieved sellers made me smile.
Well, it’s been nearly a year and a half. The success of the HAFA program thus far has been dismal at best. HAFA hasn’t provided much protection to California homeowners where so many affected by the financial crisis have high-balance second(junior) liens against their property. The reason for this is that junior lien holders are oftentimes not satisfied with the cap of $6000 HAFA allows as payment in full for all junior lien holders combined. When the amount doesn’t meet the junior lien holder’s criteria, they can opt out of the program. And if the junior lien opts out, then the homeowner does not qualify for HAFA. Therefore, after doing all the work, homeowners are often bounced to the traditional short sale queue which leaves them vulnerable to deficiency judgments.
Enter SB 458:
SB 458 was signed into law by California Governor Jerry Brown on July 15, 2011. It was a very good day for California homeowners looking for a way to sell their overleveraged properties and avoid foreclosure. This new California law states that no lienholder -first, second or otherwise- can pursue any type of deficiency against owners of residential 1-to-4 unit dwellings who sell their properties through the process of short sale. This law applies to owner-occupied and investor-owned properties. What this means for homeowners is that they will be able to sell their homes, walk away and have genuine fresh starts. Their lenders will not have the option to go after them for the difference between what they owed against their property and what those homes actually sold for.
Critics have stated that this bill will actually do more harm than good because junior lienholders can now ask for whatever they want as settlement in order to agree to a short sale. But the reality is that they have always had the ability to ask for whatever they want, and often do. The HAFA program hasn’t done much to stop them in that regard.
SB 458 does open the door for junior liens to request higher settlement amounts, which they will probably do, at least for a while. And we will still see approvals where they ask for more than the first lienholder is willing to agree to. In cases like that, we will still have to go to the buyers and sellers to bridge the gap. However, what we may begin to see happen is first lienholders sharing more of the short sale proceeds with junior lienholders to appease them for the sake of the deal. This would be the ideal situation. When I negotiated my first short sale the second lienholder agreed to a $1500 settlement on a $120,000 note and barely put up a fight. Today, first lienholders are agreeing to junior settlements of six to ten percent of recorded loan amounts. This is proof that we are making some sort of progress.
So, does SB 458 mean the end of the HAFA program in California?? Maybe not now but it is very possible in the near future.