Tiffany Osterli, REALTOR® - Bringing Your Dreams Home

Yuba City, Marysville, Plumas Lake, Sutter, Live Oak, CA Real Estate and Homes for Sale

BRE #01408438
SB 458 Means No Deficiency for Most California Short Sales

 

A new state law that took effect on July 15, 2011 provides protection for sellers against a lienholder seeking a deficiency judgment when a home is sold through a short sale. The bill containing the new provisions, SB 458 (Corbett), was co-sponsored by the California Association of REALTORS® (CAR) and the California Bankers Association (CBA). Prior to this legislation, short sale sellers were only protected against deficiencies on senior liens (first mortgages). Junior liens (e.g., second mortgages) were exempt from the deficiency protections. While junior lienholders did not often seek deficiency judgments, the fact that they could meant that short sale sellers with junior liens could be exposed to a certain amount of risk. The new law prohibits both junior and senior lienholders from requiring the seller to pay a deficiency and from seeking a deficiency judgment through the courts if they agree to a short sale.

What effect will this new law have on short sales? That remains to be seen. On initial examination, it might seem that junior lienholders will be discouraged from approving short sales, because the new deficiency protections only apply if they approve the sale. However, in the vast majority of short sale cases, the seller is experiencing financial hardship, which means that absent a short sale, the home would probably end up in foreclosure.   Since deficiencies are prohibited for foreclosures, junior lienholders would end up with nothing, as all of the proceeds from the foreclosure sale would typically be paid to the first lienholder.   In contrast, the first lienholder in a short sale will usually offer a portion of the proceeds in exchange for the junior lienholder agreeing to the sale.  Thus, it seems logical that for short sales where the seller has a legitimate financial hardship, junior lienholders are likely to continue approving short sales despite the fact that they will no longer be able to seek a deficiency after the sale.

For most sellers, the new law means that even if there is a second mortgage, the risk of a deficiency is no longer a consideration.  There are some exceptions, but they apply only in very specific cases.  For more information on the new law and potential exceptions to its deficiency protections, see the CAR press release, the CBA compliance bulletin, and/or the full text of SB 458.

For more information on short sales, or to request specific short sale information, visit our short sale information page.

 

 

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