Homeowners say in a class action that Capital One illegally made them pay thousands of dollars in deficiency contributions after short sales of their homes. See http://www.courthousenews.com/2012/01/05/42781.htm . The lawsuit states "Capital One has refused to comply with SB 458. In clear violation of the statute's unambiguous prohibition, Capital One has illegally required California borrowers to pay the deficiency on their mortgages, in addition to 'the proceeds of the sale, in exchange for [Capital One's] written consent to the sale.' As a result, Capital One has generated substantial revenues from the collection of deficiencies from California-based borrowers in connection with completing short sales". (Brackets in complaint.)
Lead plaintiff Roni Teson says Capital One came after her for a $60,000 deficiency contribution on her Rancho Cucamonga home, and refused to approve a short sale offer of $570,000, even after her Realtor reminded the bank holding company of the new law.
In July 2010, SB 458 (Corbett) became law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
Under previous law (SB 931 of 2010), if a first mortgage holder accepted an agreed-upon short sale payment as full payment for the outstanding balance of the loan, they could not pursue a deficiency judgment, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.
Many welcomed this new law thinking that it eliminates the problem of property owners having expossure to deficieny judgments for junior liens after a short sale or will prevent the junior lender from negotiating an additional settlement amount other than just the sale proceeds in order to agree to a short sale .
While it is true that under SB 458 if a junior lien holder agrees to a short sale that they waive any future deficiency judgment, the legal department of the California Assn. of Realtors told me that there is nothing in the law that compels the lien holder to agree to the short sale. Although the law states that the " holder of a note shall not require the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale ", this does not necessarily mean that the junior lender must agree to the short sale if they believe that they would benefit by letting the first lender foreclose and then pursue a deficieny judgment.
There is also nothing in the new law that prohibits a borrower from "voluntarily" offering a monetary contribution to a lender in hopes of obtaining a short sale. A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, the buyers, agents, relatives, and the like.
It will be interesting to follow this case to see if the courts rule that, in fact, the law requires that the short sale lender must accept a short sale even if they do not believe that it is in their best interest to do so if they believe that they can pursue and collect a deficiency judgment
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