Senate Bill 458: Junior Lenders Cannot Pursue Borrower to Make Up for the Deficiency in a Short Sale
Recently passed in July 15, 2011, SB 458 protects homeowners in California who elect to do a short sale. According to this bill, senior and junior lien holders cannot pursue the borrower to sign a promissory note for the balance once they approve the short sale.
Previous law, SB 931, only applied to senior lien holders. Junior lien holders had the choice to approve a short sale only if the borrower would agree to sign a promissory note to pay the full balance.
This new law, however, doesn’t require or force the junior lien holders to approve the short sale. But if they do approve the short sale, then they must accept the short payoff as full payoff and must agree NOT to pursue the deficiency judgment and must NOT go after the homeowner to sign a promissory note for the balance amount after the short sale closes.
Here are the excerpts from the Bill:
“Effective immediately for transactions closing escrow from this day forward, both senior and junior lien holders cannot require a borrower to owe or pay for a deficiency in a short sale. This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units. Any purported waiver of this rule shall be void and against public policy.“
Although lenders are prohibited from pursuing borrowers to pay any additional compensation in exchange for a short sale approval, the law allows the seller to voluntarily offer a monetary contribution as an incentive to the lender for providing short sale approval. A lender is also permitted under this new law to negotiate for a contribution from someone other than the seller, such as other lenders, agents, relatives, the new buyer, etc.
This bill applies to single family homes, duplex, triplex and 4-plex residential, owner occupied or investment properties. This law does NOT apply to lenders seeking damages as a result of fraud. Also, the law does NOT apply to borrowers who are corporations, LLCs, limited partnerships, or political subdivisions of the state, liens secured by bonds, public utility liens, and HOA liens.
While SB 458 is a huge relief to distressed homeowners who opt to do short sales, yet it introduces new challenges to the realtors who negotiate short sales with the lien holders on behalf of their clients. Reaction has been mixed to this law. Some feel that it will make it harder for short sales to be approved, as it takes options away from the junior lenders. Some feel that it will lead to far easier short sale approvals. Since this is such a new law, there are no precedents or case law yet. At this early stage, it is difficult to say how this bill would impact real estate market as it might make it harder to get short sale approval from junior lien holders and may result in more foreclosures.
However this plays out eventually, rest assured that if the junior lenders DO approve the short sale, you are much better off as a homeowner.
Her twins were born, and that was fun!
Now a mom to her daughter and son
They say integrity is hers in spades
Once it’s closed, the clients sing her praise
When I first started out, I used to make a hard copy of the entire file and literally stand in front of my fax machine, hand feeding it every single page manually. Even though the fax machine had an automatic document feeder, short sale packages are too big and have too many pages. I would get through about 65 or 80 pages and then have the fax machine jam. I cannot tell you how totally frustrating this was, because each page took almost a full minute. That was 1 ½ to 2 hours completely wasted. And then you had to start all over again!!! You had to start from the beginning, babysit the fax machine, and again waste all that time. You know that the lender would throw out an incomplete short sale package. At times, I would take the entire package to a print shop and then pay $75 or more to have their machines send the entire file.
So I kept thinking: There has to be a better way.
I did tons of research and discovered that you can even do this if you don’t have a FAX machine! It is incredible!!! Find an internet faxing service provider. Cheap, easy to use, requires internet access and an account, but it costs money. I’ve used Maxemail for years and just love it. There are lots of providers.
But you don’t have to use an internet faxing service provider at all! If you have a relatively recent computer that has a modem installed, you can use Windows XP, VISTA (must have Business or Ultimate Edition) or Windows 7 to fax directly from your PC w/o a fax machine.You just need to use the built-in software that comes with Windows OS.
Start>All Programs>Windows Fax and Scan. It’s very easy to use and set up and configure.
NOTE: You MUST use a cable to connect your computer to a phone jack in your house. It’s just a regular plug-in telephone cord that you would use to connect your phone to the phone jack.
That’s it. Now you just use the software that comes with the Windows OS, and you are set! Remember that if you only have one telephone line in your house, you cannot make or receive calls while the fax is going through.
Remember that each page will take approx. one minute to fax, so plan accordingly.
Also, tip # 2 is huge: Make sure that you use the Header feature to put the loan # on each and every page associated with your short sale.
If you have 2 lenders, make sure to save one short sale pkg with one loan # and the other short sale package with the 2nd lender’s information.
Good luck! Hope that this helps!
Now go out and close more short sales and help more Homeowners.
Contact me if you hate short sales. I love them and would love to do the negotiations for you. I will make short sales fun for you! I will take all the drudgery and hassles out of doing short sale. Already helping other realtors by negotiating their short sales and would love to be of help to you too!
Buying a house is probably one of the biggest investments you will ever make. Often, in the excitement and anxiety of taking this huge step, new home buyers are not aware of what is involved in the process and where to begin.
Being a real estate broker, everyday I receive tons of calls from buyers who are interested in my listings, but when I ask them if they are pre-approved, most of the times I get the same answer: “No, we are just getting started.”
The very first step to becoming a homeowner is to get a pre-approval. Pre-approval is an easy process, but it is time-consuming. It usually takes at least one month to get the pre-approval letter in your hands. Then, you will know exactly how much of a house you can qualify for, and the pre-approval letter assures the seller that you are a serious and well-qualified buyer.
You can start with your own bank or any bank or credit union of your choice. You will have to meet them or talk over the phone. The information that all of them want will be exactly the same: Where do you work? What is your job? How long have you been employed in that same line of work? How long have you had your current job? What is your salary? Do you have any other income? How many borrowers will there be? Yourself? Husband and wife? How much do you have saved? What other debts do you have? They all will require a credit report, copy of two years of income tax returns, and recent pay stubs to prove employment and income. They will require this information from every person who will be on the loan.
Once your mortgage broker receives all the information from you, you will know exactly what type of financing, interest rate, and mortgage amount you can qualify for. Then, your mortgage broker will issue you a pre-approval letter summarizing all this information. Your realtor will submit this pre-approval letter with any offers that you will make. Most sellers will not even look at or consider offers that don’t have a pre-approval letter with them. That is why it is crucial to start the pre-approval process as soon as possible. The sooner you start, the more quickly you will be able to make offers and ultimately become a homeowner.
A short sale is a payoff to the lenders for less than the amount owed on the total balances of all mortgages.
A short sale requires the lender’s approval (any lender that is getting “shorted”), so it’s usually more complicated and takes longer than a standard sale.
Do you remember all the paperwork required when you first applied for a loan? That is exactly the same paperwork that is required for a short sale. In addition, the lenders will need to see some extra paperwork. In a nutshell, the paperwork required by most lenders is:
• Income tax returns and W-2 or 1099 from most recent 2 years
• Most recent pay stubs x 1 month–4 months
• Most recent checking account statements x 2 months — 4 months
• Most recent savings account statements x 2 months — 4 months
• Most recent IRA, 401 K, etc. statements x 2 months — 4 months
• Hardship letter (written in your own words, — tell the lenders exactly why you cannot make the payments—whether it is job loss, hours cut, divorce, payment increase, medical problems, etc.)
• Financial Statement Most lenders will require you to fill out a complete financial statement, where you will list all your assets (houses, properties, IRA, 401 K, checking accounts, savings accounts, etc.) and bills owed (all mortgages, credit card debts, student loans, all other debts & liens, etc.)
Tom and Barbara (not their real names) called me just the other day and wanted me to do a short sale on their home. They were referred by a very happy client whose short sale I had just closed. However, there were huge differences. Tom and Barbara lived in a home (NOT the short sale property) that had over $100,000 of equity in it. I advised them not to do the short sale on the property that they had just moved from. I told them that I’d make money, but that I did not think that a short sale was in their best interests. Keep in mind that the lender’s job is to mitigate (or reduce) the amount of loss that they are experiencing. Therefore, their job is to get as much money out of you, the Seller, as possible. If you have a lot of other assets, like other homes, particularly with a lot of equity, you may want to think twice about doing a short sale on an investment property. You don’t want to have your assets as a big fat target for the lender! Every time you talk to the lender, the conversation usually starts out saying, “We are advising you that we are a debt collector, and any information that you give us may be used to collect a debt.”
I’ve counseled many people against doing short sales for the above reasons. Yes, I’ll make money on it, but it may not be in your best interest to do a short sale. Again, I am not an attorney. This is not to be construed as legal advice. Always get advice on your particular situation from your tax expert and your attorney for tax and legal implications of a short sale.
I’m going to share a valuable lesson that I learned several years ago through the “School of Hard Knocks.” This is when I was just getting started doing short sales. Hope that you will chuckle, but more importantly, hope that this will prevent you from making the same mistake!
This involves doing a short sale on a property that has the 1st and 2nd mortgages with the same lender (referred to below as ABC Bank).
We prepared the short sale pkg meticulously, as we always do. We got the authorizations signed by the borrowers for the 1st and the 2nd lenders (same bank) and faxed both of the authorizations to the same fax number (given to us by Customer Service). We faxed the entire short sale package to the Loss Mitigation fax number that Customer Service of ABC Bank gave us. About 2 days later, I was planning to call to follow up, to ensure that the package had been received. To my surprise, Edward of ABC Bank called me first, to say that, “I am your Loss Mitigator on this file.” Great!! We now had Edward’s email address, phone #, all contact info, and he had assured us that he had received the package.
About a week went by, and I called to get status to find out when the lender was going to do a BPO on the property. I was told to wait another week, and I called again. After leaving multiple phone and email messages for Edward and getting no response for about 2 ½ weeks, I then just talked to the Loss Mitigation customer service phone rep who answered the phone lines. After reviewing the file, he gave me astonishing news: “We can’t order the BPO. The 1st has to do that. They haven’t even assigned a mitigator to this file yet.” I pointed out that the 1st and the 2nd were ABC Bank, both the same lender. I pointed out that Edward had called us first, stating, “I am your Loss Mitigator on this file.” Nonetheless, to my amazement, he told me that the 1st was not in an office just down the hall. The 1st was not in an office on another floor of this building. The 1st was not in a different building in a different part of this city. No, the 1st was in a different CITY and STATE altogether!! Not only that, the 1st had not even seen the short sale package, had not received the authorization, etc. The 2nd Loss Mitigator (Edward) did not even communicate with the 1st.
Wow! Was my face red!!! Well, to make a long story short, the deal closed just fine. I dropped what I was doing, faxed the authorization immediately to the 1st lender, faxed the entire short sale pkg immediately to the 1st lender, got the name & contact info for the Loss Mitigator for the 1st, and closed the deal. It did take longer because the 1st was 2 ½ week behind the 2nd as far as evaluating the deal, approval, etc. Now, I deserve most of the fault for this, but being a “newbie” at that time, I took Edward’s word for it when he said, “I am your Loss Mitigator for this file.” He absolutely did not state, “I am your Loss Mitigator for the 2nd lien for this file.”
So, lessons learned: Never, ever, ever assume that the 1st and 2nd liens for the same bank are covered/handled by the same group of loss mitigators. In fact, always assume the opposite. Always assume that you will be talking to 2 different loss mitigators in different cities, states, etc. Treat the lenders like they are from 2 different banks, companies, etc. Then you will be pleasantly surprised if and when you find out that you only have to deal with one person for both the 1st and 2nd liens!
This could have ended very badly. We could have lost much more time finding out that the 1st was entirely different; we could have lost a buyer who got frustrated with the delays, etc. But there are so many ways that a short sale can go wrong. Put success on your side, and make sure to do the little things well, to dramatically increase your chances of closing!