Short Sales: When a second becomes nonrecourse
By Paul Rovella
Lombardo and Gilles
A few months ago, the Pinnacle ran my article summarizing Senate
Bill 931 (
”
SB 931
”
), which became effective Jan. 1, and prohibits lenders holding
a first Deed of Trust on a residential property from obtaining a
judgment against the former homeowner for the deficiency arising
from a short sale. The main advantage to a foreclosure over a short
sale was that, by foreclosing on the property, the lender had
elected their remedy for the default on the loan. A foreclosing
lender is not eligible to take back the property (or sell it at a
Trustee’s Sale) and get a judgment from a court for the net balance
owed on the defaulted loan after subtracting the proceeds from the
sale of the property.
Short Sales: When a second becomes nonrecourse
By Paul Rovella
Lombardo and Gilles
A few months ago, the Pinnacle ran my article summarizing Senate Bill 931 (“SB 931”), which became effective Jan. 1, and prohibits lenders holding a first Deed of Trust on a residential property from obtaining a judgment against the former homeowner for the deficiency arising from a short sale. The main advantage to a foreclosure over a short sale was that, by foreclosing on the property, the lender had elected their remedy for the default on the loan. A foreclosing lender is not eligible to take back the property (or sell it at a Trustee’s Sale) and get a judgment from a court for the net balance owed on the defaulted loan after subtracting the proceeds from the sale of the property.
By comparison, unless otherwise expressly agreed to by the lender and the homeowner in the short sale contract, a lender who approved a short sale was still able to proceed against the former homeowner after the short sale for the remaining balance owed on the original loan. SB 931 was intended to equalize short sales and foreclosures on that very issue.
Although SB 931 did help homeowners facing default on their mortgage by making short sales a more favorable option, SB 931 may still not have been much help. If you bought your house in the mid-2000s, you likely have a first mortgage and a second (or a home equity line of credit), in which case your question after reading my May article may have been, “SB 931 is great for the first mortgage, but what about the second?” At the time, the answer was that SB 931 only applied to first mortgages, so the rights of the lender in second position were not impacted or limited.
Senate Bill 458 (“SB 458”) was introduced by Senator Ellen Corbett to address that very problem. Effective July 15, 2011, SB 458 amended Section 580e of the California Code of Civil Procedure, to eliminate deficiencies owed after lender-approved short sales and prohibits a lender who approves a short sale from obtaining a deficiency judgment against a defaulting borrower for the balance owed after the short sale. SB 458 extends the deficiency protection to defaulting homeowners provided by SB 931 to second mortgages or holders of home equity lines of credit. As a further protection, a lender cannot require the homeowner to pay anything more than the proceeds of the short sale to obtain their approval, and by law, the requirements of SB 458 cannot be waived.
Although SB 931 exempted second mortgages and home equity lines of credit from its protections against deficiencies arising from foreclosure sales, SB 458 was quickly enacted to extend those short sale deficiency protections to any deeds of trust or mortgages where the lender(s) approve the short sale.
If you are in default on your first and/or second deed of trust or mortgage or facing the prospect of default you may wish to contact a real estate professional and/or an attorney to discuss the option of a short sale and the protections afforded you by SB 931 and SB 458.
This column is the work product of Lombardo & Gilles, LLP, which has offices in Hollister and Salinas. Paul A. Rovella is an attorney with Lombardo & Gilles, LLP. You may contact the author at (831) 630-1722 or [email protected]. Mail your questions to Paul A. Rovella, It’s the Law, c/o The Pinnacle, 350 Sixth St. Ste. 102, Hollister, CA 95023.
