A major victory for Tri-Valley and California home owners Friday when Governor Brown signed into law Senate Bill 458, aimed at helping those who may need to do a short sale.
This new bill prohibits a deficiency after a short sale for one-to-four residential units, regardless of whether the lender is a senior or junior lienholder.
Effective immediately for transactions closing escrow moving forward, both senior and junior lienholders cannot require a borrower to owe or pay for a deficiency in a short sale. This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units. Any purported waiver of this rule shall be void and against public policy.
While 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 still permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders.
Exceptions to the new law include 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; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.
It will be interesting to see what unforeseen ramifications this may have. Some lenders have been adamant to retain their right to later pursue the deficiency, and unfortunately we wouldn’t be surprised if certain lenders start denying short sales to preserve that right. We’ll keep you updated as we see how this plays out.
