Senate Bill 458: Junior Lenders Cannot Pursue Borrowers to Make Up for the Deficiency in a Short Sal

Online, September 15, 2011 (Newswire.com) - Recently passed in July 15, 2011, SB 458 protects homeowners in California who elect to do a short sale. According to this bill, senior and junior lien holders cannot pursue the borrower to sign a promissory note for the balance once they approve the short sale.

Previous law, SB 931, only applied to senior lien holders. Junior lien holders had the choice to approve a short sale only if the borrower would agree to sign a promissory note to pay the full balance.

This new law, however, doesn't require or force the junior lien holders to approve the short sale. But if they do approve the short sale, then they must accept the short payoff as full payoff and must agree NOT to pursue the deficiency judgment and must NOT go after the homeowner to sign a promissory note for the balance amount after the short sale closes.

Here are the excerpts from the Bill:

"Effective immediately for transactions closing escrow from this day forward, both senior and junior lien holders 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."

Although lenders are prohibited from pursuing borrowers to pay any additional compensation in exchange for a short sale approval, the law allows the seller to voluntarily offer a monetary contribution as an incentive to the lender for providing short sale approval. A lender is also permitted under this new law to negotiate for a contribution from someone other than the seller, such as other lenders, agents, relatives, the new buyer, etc.

This bill applies to single family homes, duplex, triplex and 4-plex residential, owner occupied or investment properties. This law does NOT apply to lenders seeking damages as a result of fraud. Also, the law does NOT apply to borrowers who are corporations, LLCs, limited partnerships, or political subdivisions of the state, liens secured by bonds, public utility liens, and HOA liens.

While SB 458 is a huge relief to distressed homeowners who opt to do short sales, yet it introduces new challenges to the realtors who negotiate short sales with the lien holders on behalf of their clients. Reaction has been mixed to this law. Some feel that it will make it harder for short sales to be approved, as it takes options away from the junior lenders. Some feel that it will lead to far easier short sale approvals. Since this is such a new law, there are no precedents or case law yet. At this early stage, it is difficult to say how this bill would impact real estate market as it might make it harder to get short sale approval from junior lien holders and may result in more foreclosures.

Colleen Coleman is a licensed real estate broker and short sale expert in southern California and has helped numerous homeowners to avoid foreclosure by doing short sales.