Good News For Short Sales

SB931 is the new law which will take effect in January 2011 that protects a short sale seller from a deficiency judgment against them if the loan that is being short sold was a refinance. This applies to the first Deed of Trust only, not the second Deed of Trust. Purchase money has always been non-recourse in California, but a refinance had been considered a “voluntary lien.” This law changes that. Of course you should always consult your CPA or tax attorney to really understand what tax liabilities you may have as a result of your short sale. Second deeds of trust ARE NOT covered by this law. It protects you on first deeds of trust only. You must negotiate a “paid in full” status on your second if you sell short or if you give the first deed of trust lender a “deed in lieu” of foreclosure. Expect to see more “deeds in lieu” of foreclosure in 2011 as lenders use it as an alternative to standard foreclosures to escape a flawed foreclosure and to forego long holding periods of standard foreclosures.

NO JUDGMENT SHALL BE RENDERED FOR ANY DEFICIENCY UNDER A NOTE SECURED BY A FIRST DEED OF TRUST OR FIRST MORTGAGE FOR A DWELLING OF NOT MORE THAN FOUR UNITS, IN ANY CASE IN WHICH THE TRUSTOR OR MORTGAGOR SELLS THE DWELLING FOR LESS THAN THE REMAINING AMOUNT OF THE INDEBTEDNESS DUE AT THE TIME OF SALE WITH THE WRITTEN CONSENT OF THE HOLDER OF THE FIRST DEED OF TRUST OR FIRST MORTGAGE. WRITTEN CONSENT OF THE HOLDER OF THE FIRST DEED OF TRUST OR FIRST MORTGAGE TO THAT SALE SHALL OBLIGATE THAT HOLDER TO ACCEPT THE SALE PROCEEDS AS FULL PAYMENT AND TO FULLY DISCHARGE THE REMAINING AMOUNT OF THE INDEBTEDNESS ON THE FIRST DEED OF TRUST OR FIRST MORTGAGE.

However, if the Seller/Trustor commits fraud in the sale of the real property or commits waste on the property, then the law would still allow the Lender to seek damages and use existing rights and remedies against the Trustor/Mortgagor/Seller or any third party for fraud or waste.