November 2nd, 2010 3:46 PM by Lehel S.
NEW SHORT SALE LAW - HELP OR HINDRANCE ?
By Jim Klinkert
Governor Schwarzenegger recently signed into law SB 931, which prevents lenders fromseeking deficiency judgments following short sales in certain situations. The new law, set forthin Code of Civil Procedure section 580e, states “no judgment shall be rendered for any deficiencyunder a note secured by a first deed of trust or first mortgage for a dwelling of not more than fourunits, in any case in which the trustor or mortgagor sells the dwelling for less than the remainingamount of the indebtedness due at the time of sale with the written consent of the holder of thefirst 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 tofully discharge the remaining amount of the indebtedness on the first deed of trust or firstmortgage.”
Great news ? Possibly, but there are some significant limitations and the overall effect onthe short sale market may be negative rather than positive. First, the limitations: (1) the new lawis effective January 1, 2011 and will not operate retroactively (i.e., short sale transactionsconcluded before the end of this year will not be subject to the protections of the new law); (2)the new law applies only to first trust deed loans, not junior liens; (3) only loans secured by residential property with not more than four units are subject to the new law; and (4) even as to covered transactions, a lender may still pursue claims based on fraud or waste to the property.
Potentially more important than these limitations is the possible effect on the short sale market. One possible effect is an increase in the number of short sale transactions because a major risk to the seller has been eliminated. However, the exact opposite effect could occur.
The number of short sale transactions could actually decrease because many lenders who no longer have the right to seek a post-sale deficiency judgment may simply refuse to consent to the short sale. We are currently advising our clients that if they wait until next year to attempt a short sale the risk of continuing loan liability may be eliminated, but at the same time their lender may be unwilling to consider a short sale because of the new law.
[CVAR legal counsel Jim Klinkert is an attorney with 25 years of experience in real estate law and a member of Ritchie, Klinkert & McCallion in Ontario, California. Jim can be contacted by phone at 909-390-9999 or by email: firstname.lastname@example.org]