SHORT sale occurs when a property sells for less than the remaining amount of indebtedness. Banks can go after homeowners for the deficiency – the difference between a low sales price and a high loan amount.
The passage of two anti-deficiency judgment bills is a victory for California homeowners who have been forced to short sell their homes, only to find that lenders can pursue them after short sales for the difference between the loans and the proceeds that the properties sold for.
We discussed relief from deficiencies on first deeds of trust in a prior article. Let’s discuss Senate Bill 458 that helps borrowers on junior liens (second deeds of trust and home equity loans).
Gov. Jerry Brown signed Senate Bill 458, authored by Senate Majority Leader Ellen Corbett, on July 11, 2011. It was effective immediately as an urgency statute. SB 458 builds on the protections initiated by SB 931 which required the first lien holder in a short sale to accept an agreed-upon payment as full payment for the outstanding loan balance. This new law extends this prohibition to all junior lenders as well. It prohibits secondary lien holders from pursuing deficiencies after a short sale closes. In short, Senate Bill 458 requires the same “no recourse” treatment for all secondary loans.
Points of Clarification:
• These rules apply only to residences.
• Dwellings don’t have to be owner occupied.
• Dwellings cannot be more than four units.
• A lender is prohibited from demanding a seller to contribute as a condition of approval.
• However, a borrower may voluntarily offer monetary contribution to a lender to obtain approval.
• A lender is permitted to negotiate a contribution from other lenders, agents, and relatives.
The New Law Does Not Apply To:
• Foreclosures;
• A lender seeking damages for a borrower’s fraud or waste;
• A borrower that is a corporation, LLC, limited partnership, or political subdivision of the state;
• A lien secured by a bond as specified or a public utility lien.
The Beauty of Senate Bills 931 and 458:
Both bills are blessings to homeowners who lose their homes to short sales. Without these bills, miseries of homeowners do not end with the loss. They may also face lawsuits by banks who try to recover funds that have not been fully paid from the sale. SB 458 comes to the rescue by ensuring that once a lender agrees to accept a short sale, all lien holders – senior and junior loans – must consider the outstanding balance as paid in full. Homeowner will not be held responsible for additional payments. In short, these two new laws protect homeowners by barring first and second lien holders from going after sellers after short sales.
In Summary:
• SB 931 prohibits primary lien holders (first trust deeds) from pursuing deficiencies after a short sale closes.
• SB 458 prohibits secondary lien holders (second trust deeds and lines of credit) from pursuing deficiencies.
In summary, both laws prohibit lenders from going after first, second, and subsequent mortgages.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.
