In July 2011, Governor Jerry Brown of California signed the landmark SB 458, which is HUGE for CA homeowners and investors. It basically protects them against all junior lien holders if they complete a short sale on their property in CA.
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.
This is HUGE for California homeowners and investors!! This law protects you if it’s your own personal primary residence and if it’s an investment property that you own. 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 or an investor.
However, BEWARE if you opt for foreclosure instead of a short sale and the protections offered by this law. If you opt for a foreclosure, here’s what generally happens: Usually, the 1st lender is the one foreclosing. Let’s use some actual numbers. Let’s say that the fair market value of the property is $175,000. The 1st lender is owed $325,000. The balance on the 2nd loan is $42,000. The 1st lender will try to sell the property on the court house steps (at auction) for the balance owed ($325,000), but there will be no takers. Why? Because no investor will pay $325,000 for a property only worth $175,000!!! So the property goes back to the 1st lender and becomes an REO asset. What happens to the 2nd loan, you ask? Great question! It gets wiped out!!! This makes the 2nd lender furious! They are owed $42,000, but they get zero, nada, bupkus. Well, it doesn’t stop there. The 2nd lender can and does typically go after the homeowner very aggressively by generally selling this debt to a collection agency of some sort. That collection agency will then pursue the homeowner to the ends of the Earth with phone calls, letters, etc. demanding payment. And that’s not all!! These collection agencies will demand the FULL amount of the debt owed (in this case, $42,000). That is not a fresh start, to have these collection folks harassing you for payment after losing the property!
The HUGE advantage to this law is choosing a short sale protects you. All the junior lienholders and the senior lienholder have to agree to the amounts of the proceeds that they will receive from the short sale (and that’s where negotiation skills and experience are crucial), but once they do agree and the short sale closes , YOU ARE DONE!! Your debt is resolved!! No lender can ask you to bring money to the table. No lender can ask you to sign a promissory note to pay back a portion of this debt in the future. No collection agency will harass you. This is truly a fresh start and an amazing protection for California homeowners! Again, this protection applies to most people (please read exceptions above). So if you have more than one loan, do a short sale and protect yourself. Go forward in the future with a fresh start and a zero balance sheet.