Kirk M West's Blog

September 30, 2010 was a big day for anyone in California short selling property. On that day, Governor Schwarzenegger signed into law SB 931, will take effect on January 1, 2011 and will be codified in the California Code of Civil Procedure Section 580e, what we commonly refer to as the "anti-deficiency" statutes. This is an important win for upside-down owners. For the last few years, the question has been: what is the deficiency liability following a short sale. This statute answers it in part.

The new 580e states in part: "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."

What this new law appears to mean is this: if you complete your short sale on your residential property, there will be no deficiency obligation on the first mortgage. Unlike the existing Section 580b which only protects borrowers with "purchase money loans" on their primary residence, the new 580e catches all first loans on all residential properties regardless of whether they have been refinanced or not. While there are some ambiguities, the statute states that there will be no deficiency for any note secured by a first deed of trust or first mortgage. By writing the statute with such broad language, it reasonably should cover both residential investment property as well as refinanced first loans. Essentially, what the new 580e does is provide the same anti-deficiency protection that Section 580d currently provides following a Trustee Sale.

While this is good news with respect to first mortgages, the statute has no effect on liability regarding junior loans (seconds, thirds, HELOCs, etc). Sellers will still need to work with and negotiate with their lenders on obtaining a release of liability from the juniors. However, this is a step in the right direction. The majority of time, the first loan is the biggest loan and the biggest worry. California has now provided the assistance and tools needed to deal with the deficiency on the first.

The information presented in this Article is not to be taken as legal advice. Every person's situation is different. If you are upside-down on your loan(s), and considering a short sale, get competent legal advise in your State immediately so that you can determine your best options.

This is not given as legal advice but merely our desire to keep our valued friends and clients informed. 

If you have specific questions about your liability in California or about short sales, foreclosure, tax implications, feel free to contact me at Kirk@KirkMWest.com or call Realty Qwest at (916) 473-1334.  We offer a FREE consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone.  Till next time!