California SB 458- Mortgage Deficiency Forgiveness
Governor Jerry Brown signed into law SB 458 on July 15th. This bill will prevent second mortgage holders from pursuing a borrower after the closing of a short sale for the remaining balance on a loan. This is an extension of the current bill SB931 that is for first mortgages in California. The new law also bars any short sale lender from requesting or requiring any contribution from the seller. Lenders have had two paths to get sellers to share the deficiency: Recourse after the short sale and Contribution at the short sale closing. January’s SB 931 stopped recourse for first lenders; Friday’s SB 458 stopped recourse for junior lenders and stopped all contribution.
SB 458 applies to 1 to 4 units in California, and is only for a short sale. This does not protect someone who goes through foreclosure. Junior lenders such as a second or third mortgage, including HELOCs can no longer pursue a deficiency after a short sale. California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lien holders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
Before this bill, it was possible for a homeowner to go through with a short sale only to after have the second lender come after them and require payment for the difference. There are many cases where sellers would close on a short sale with the deficiency language in the letter saying the bank had the right to pursue them. In many of the short sales we deal with, we have to fight for the bank to remove the deficiency verbiage. And there are times where this is not free. We are seeing some lenders ask for seller contributions or promissory notes to remove deficiency language. With the new law outlawing the banks from asking for contribution from sellers, it will be interesting to see how second lenders start reacting to short sales.
This bill became effective as soon as it was signed due to the urgency clause in the bill. Exceptions to the new law include a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, LLC, limited partnership, or political subdivision of the state; a lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.
This is great news for Short Sales. Homeowners who successfully complete a short sale on their home and have any second or third mortgage will now not have to wonder if they will ever hear from their junior lien holder. Since this law does not apply to foreclosures, completing a short sale is even more critical now.
The question you may ask is will all junior lien holders agree to the short sale?
Some junior lenders will not. Some will decide that they are not receiving enough money from the short sale (the first lien holder usually gives them somewhere around $3,000-$5000 from the buyer’s offer) and will allow the first to foreclose and then go after the homeowner for a deficiency at a later time. They will have this option. This is why it is so important to have a strong negotiator on your side when doing a short sale.
If you are thinking of doing a short sale , now really is the time. With tax forgiveness until 2012 and both SB 931 and the new SB 458, you really have everything to gain by sitting down to assess a short sale for your situation.
Want to understand how this may benefit you? Please contact me @ 408.425.5304 or nick to understand all your available option, and avoid foreclosure!