Good News for Short Sale Sellers and Junior Mortgages (and How Jerry Brown Used to Look)

Finally, short sale sellers in California and the Long Beach/Los Angeles County area have more protection against deficieincy judgments.  Senate Bill 458 was signed into law on July 15th by Gov. Jerry Brown, effective immediately. This was previously turned down by former Governor Schwarzeneggar, but is now made part of the protections of SB 931 which was passed into law as of 1/1/2011.

This means that if you have a second loan on your principal residence and the holder of the junior lien agrees to a short sale, there is no "deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units", per the California Association of Realtors. Additionally, this law does not appy in situations of fraud or waste (deliberate damage), it applies to residences, and does not apply to corporate owners, LLCs, and a few other exceptions. Previously, the protection was against first mortgages only, but is now extended to the seconds and other junior mortgages.

It is certainly intended for the owners of homes who are upside down in market value, but does not seem to specifically include investment property as long as it is within the 1-4 unit category.

Also, "although a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval, the new law does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale.  A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, agents, relatives, and the like", per the California Association of Realtors. 

So, this bill may require investors on short sale loans to decide more quickly if they are going to allow a short sale or not, depending on whether or not there they have a chance of obtaining an outside contribution (will we see an increase in those incidences?), or just head straight for foreclosure.  They now have to get whatever funds they can get PRIOR to the final short sale approval, because they will not longer have the ability to agree to the short sale and close escrow, and then pursue a judgment later to recoup on their losses.

Do You Remember When?

The good part is that once a sale is approved for a mortgage which falls under SB931 and SB458, the California owner is assured that no deficiency can be obtained--but how the negotiations will proceed before that time is unknown. Short sale sellers should always carefully document their hardship situation when applying to their lender for a short sale.