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Short Sales and Deficiency Judgments: Same Game, New Rules for California

James Doan - Tuesday, August 16, 2011

Hopeful to mitigate the ongoing foreclosure crisis and encourage short sales as a foreclosure alternative, California’s governor signed SB 485; an amendment to California Code of Civil Procedure Section 580e that now prohibits junior mortgage holders from pursuing deficiency judgments after they have agreed to a short sale. Prior to SB 458, the seller was protected only from deficiency judgments from the first lien holder.

A deficiency judgment refers to the difference between the sale proceeds and the balance on the note. The new law now prohibits any lien holder who has agreed to a short sale from pursuing the seller for a deficiency judgment.

Under this law, the holder of the note cannot demand additional compensation, aside from the proceeds of the sale, in exchange for written consent to the sale. That said, the law doesn’t prohibit the homeowner from voluntarily making an offer to the lender with the hope that the lender would agree to the short sale. Contribution to these negotiations could come from other lenders, agents, or even relatives of the borrower.

Of great value is the protection against homeowners being unknowingly exposed to deficiency judgment by short selling their homes. Protection under SB 458 applies to a broad range of 1 to 4 residential properties. Included are cash-out refinanced loans, non-owner occupied homes, second homes, and vacation homes.

Now that the new rules are in play, let the games begin.

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