If You Have 2 or More Loans and Your Home is Under Water in CA, You MUST Do a Short Sale.

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.

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12 Responses to If You Have 2 or More Loans and Your Home is Under Water in CA, You MUST Do a Short Sale.

  1. Norah Schayer

    great post, very informative. I wonder why the other experts of this sector do not understand this. You should continue your writing. I am sure, you have a huge readers’ base already!

    • You should speak to a real estae attorney. If you breach a contract, then you are liable for damages generally speaking and sometimes you may be sued for specific performance of a contract.Check with an attorney, or you can take your chances and tell the buyer you will not perform and offer to compensate them for his/her/their out-of-pocket costs only.You should speak to a competent attorney. Good luck in any event.

      • Great comment. You metonin:”Also, I think the intent of the bill, to increase loan modifications, doesn’t utilize the mediation process for what is is, to gain understanding from all sides and to collaboratively make decisions.”I think an important question is- does one side even care to understand? I think the perspective by the banks might still be a from a narrower perspective of not trying to “get what’s best GIVEN THE SITUATION.”

    • A 680 credit score is not bad. However, the mtgrgaoe market is in upheaval right now and many lenders have tightened up on their loan requirements. I still see a few no down programs around but only with a 750 or higher fico and full documentation. Still, if you look around I think you could find something that would work. If you have 5 or 10 percent to put down you should be able to get a loan. Check with the major direct lenders. Brokers are under scrutiny right now and the direct lenders want more control over the qualification process since they have been burned recently by loan fraud etc. So, many times they’ll offer better terms to customers who get their loans directly through them rather than through a broker. The fact that the property is a short sale shouldn’t matter too much except for the fact that you will have to get your offer in and accepted by the sellers lender before the actual foreclosure takes place. Also, consider the fact that the real estate market may continue its downward slide for a while longer. If it does then the seller will probably not be able to find a buyer before the bank forecloses especially if the property needs work. Once the bank has ownership you may be able to get a substantial discount from what it is currently priced at. It might be worth waiting.

  2. thanks a lot for the information shared.

    • I applied for a short sale in November, but did not have a buyer yet, so the lender would not even consider the short sale.1st and most important you need a BPO (or an appraisal). So you know what your house is worth and what to sell it for. Once you have a buyer you will send a hardship letter, a form called an 1126 (just do an internet search and you can find it), your listing from the date you put your house up for sale (to prove how long you have had it on the market), your accepted offer, and your buyer’s preauthorizaton letter, you will also need to send your most recent 2 bank statments and check stubs, and of course send the BPO so they know the market value of the house.Once they have all this information in hand you send it to your mortgage company and they will inform you of their ruling as to if they will let you short sale or not. It has to be in their best interest to do so, and many people believe most mortgage companys will not allow it if you are not in foreclosure (I am not sure if that is true because we didn’t start our short sale until we were in foreclosure). My realtor also just let me know that many people who are doing short sales are getting suprised at the actual closing tables that their lender is refusing to release the lien on the house without an extra few thousand dollars this usually forces the realtor to either put her commission in or allow the sale to fall thru. So unless you have an extremely generous realtor, I would plan on having an extra $3000 for closing costs.You need to make the short sale look as appealing as possible we put it to our lender this way, take the sale or come get the keys. It costs the lender a lot more to foreclose then it does to allow a short sale so you need to make them see the value of your short sale offer. Good luck make sure YOUR realtor and the BUYERS realtor understand that your sale is a short sale, so they buyer understands it could take up to 2 months for the short sale to be processed by your leednr this way you don’t have a buyer who thinks they can close fast and move in right away because it takes a long time to get it approved and worked out.

    • Abuhassanakram

      they only wanted to see my finnacial info. I thought, do i just consider the amount that my husband pays for bills as income for me, like i am charging him rent? I have no idea. I called them back and they said to submit his stuff too, and they’ll consider his income as part of mine. Does this sound right? Here is my letter. I hope i get the loan mod, as we are 3 months behind right now. Any constructive criticism? -+-+-+-+-+-To Whom it may Concern,I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. When I first purchased this condo in Dec of 2005, I was single and technically unemployed. I had just opened my own business (photo studio) but I did not have a steady income. However, I had some money in savings due to an inheritance which allowed me to put a large down payment and qualify for the loan. In 2006, i got married to my husband, who was employed at the time, and we were mainly living off of his income and my savings. I continued to work on my business but unfortunately, I had to close the studio in 2007 due to not making any profit. I took a major loss when I closed the business. Shortly afterward, my husband was laid off and I was using my savings (and eventually my 401K from a previous employer) to pay all of my bills. I did have some freelance work, but I was new to that type of work, so it was slow coming in. To make things even more difficult, the mother of my husbands daughter left town, leaving us with full custody of the 6 year old (a blessing, truly) but with no child support, and no help with her medical bills. (She had an undiagnosed condition that required a lot of appointments and exams that were expensive and not fully covered by insurance). I rely on my husbands income to pay bills so this did affect our entire household. My husband returned to a previous employer but was later laid off again, and unemployed for almost 6 months straight, up until earlier this year.To sum it up, over the last 3 1/2 years, my husband has been laid off twice and I closed the doors to my business. My savings is gone, and I used most of my 401k to make ends meet. We have sought finnacial help from family members but we honestly can not ask for much more from them. I have set up a payment plan with my credit cards in order to get back on track. Unfortunately, I have fallen further and further behind and would like you to consider working with me to modify my loan. My number one goal is to keep my home and I would really appreciate the opportunity to do that. It is my full intention to pay what I owe and to be on time with all future payments. My situation has gotten better because our family income has become more steady. I now work freelance as a web designer and production artist and have many clients. My husband was recently hired full time with a small but successful company, and recently got a raise. His employer has even hired me (part time/freelance) for some design work. Fortunately for us, this company has not seen any slowdown due to the economy. I feel a loan modification will benefit both of us, and our daughter. I would appreciate if you can work with me to lower my monthly payments, and possibly the delinquent amount, so I can keep my home.I truly am looking forward to you working with me and I am anxious to get this settled so we all can move on.Sincerely and Respectfully,etc etc

      • I really don’t know if meoiitadn will be effective in the foreclosure process. I came to meoiitadn straight from the sub-prime mortgage industry, a transition that all took place right here in Maryland. I really don’t see lenders having a great incentive to go to meoiitadn. My guess is the their ability or willingness to do loan modifications isn’t going to change much by the time they get to meoiitadn. Also, I think the intent of the bill, to increase loan modifications, doesn’t utilize the meoiitadn process for what is is, to gain understanding from all sides and to collaboratively make decisions. If anything, I hope foreclosure meoiitadn puts a human face to both lenders and borrowers. I’ve met some cold-blooded (and a few really lovely) debt collectors who are more than happy to drop the axe, and feel entitled to do so. It’s easy to blame borrowers for getting themselves in financial hot water even though many borrowers are simply plagued by unfortunate life circumstances and are not necessarily irresponsible. On the flip side, lenders can be demonized and viewed as part of a failed system, when in fact, even big mortgage lenders are run by well intentioned individuals (some of whom also own homes) who are simply working for a living and following organizational policy when they help facilitate the foreclosure process.Only time will tell, but right now, my fingers are tightly crossed.

      • You couldn’t pay me to ignore these posts!

  3. i am always learning new things with your blog this is very good.

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