Short Sale Deficiencies on First Mortgages No More Deficiency Judgment

by lotag

California Senate Bill 931 prevents Short Sale Deficiencies on first mortgages – Signed by California Governor on September 30, 2010

Starting January 1, 2011, California Senate Bill 931 prohibits lenders from obtaining a deficiency judgment against the seller after a short sale.
This applies to first Trust Deeds (more commonly known as first mortgages) secured by one-to-four unit residential property, but doesn’t limit the lender from seeking damages for fraud or waste by the seller.

The legislative counsel’s summary of the bill follows:
“This bill would prohibit a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of not more than 4 units in any case in which the (owner) sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the
holder of the first deed of trust or first mortgage. The bill would provide that written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage. ”

Existing law prevents a lender who has made a purchase money mortgage (a loan used to purchase a home, not a refinance), from pursuing a deficiency judgment after foreclosure. In a short sale, however, some attorneys have been concerned that this protection may not extend to a seller in a short sale where the lender does not expressly relieve the seller from a potential deficiency judgment even if the loan was a purchase money mortgage. This law would eliminate the confusion in the law. This law would also apply not only just for purchase money mortgages, but for “hard money loans” which are first mortgage loans not used to originally purchase the home, such as a refinance.

This law would not change existing law relating to second mortgages in a short sale, so it still remains very important for sellers to obtain written relief from future deficiency judgments from second mortgage lenders in a short sale. Many attorneys still believe, however, that if a second mortgage was also a purchase money mortgage used to initially purchase the home, that the second loan would also still be non-recourse after a short sale, but there has not been definitive case law confirming this.

From the full text:
This bill would prohibit a deficiency judgment under a note
secured by a first deed of trust or first mortgage for a dwelling of
not more than 4 units in any case in which the trustor or mortgagor
sells the dwelling for less than the remaining amount of the
indebtedness due at the time of sale with the written consent of the
holder of the first deed of trust or first mortgage. The bill would
provide that written consent of the holder of the first deed of trust
or first mortgage to that sale shall obligate that holder to accept
the sale proceeds as full payment and to fully discharge the
remaining amount of the indebtedness on the first deed of trust or
first mortgage.

Unfortunately the Governor vetoed SB 1178.
Gov. vetoes anti-deficiency legislation:
On Thursday, Governor Schwarzenegger vetoed SB 1178 (Corbett), C.A.R.’s sponsored bill that would have expanded anti-deficiency protections to consumers who have refinanced their original mortgage loans and now are facing foreclosure. In his veto message, the Governor made clear his view that the bill interferes with an existing contract.

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