SB 458: no deficiency after short sale for junior liens

SB 458 extends the protections of SB 931 (2010) that have been in effect since Jan 1 2011, to ensure that any lender that agrees to a short sale for a residential 1 to 4 property, must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans. This applies to 2nd mortgage liens, 3rd mortgage liens, etc. (a.k.a. junior lien holders; e.g. home equity line of credit – HELOC).

Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.

Practically, for short sale sellers SB 458 does means that a short sale junior lien holder cannot require additional compensation (think cash contribution or promissory as note) as part of the short sale approval. SB 458 does not exclude voluntary monetary contributions and junior lender is permitted under law to negotiate for a contribution from somebody other than the borrower, such as other lenders, agents, relatives, buyers, etc.

But SB 458 does make sure that after close of escrow of the short sale there is no more possibility that the lender will come after the borrower/seller so in effect the lien and (personal) liability will be released by all lenders involved in a short sale. This is similar to a HAFA short sale with the difference that HAFA did specifically include a seller relocation/moving credit.

Exceptions to SB 458 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.

Note to investors: as long as the property you’re holding is a residential 1 to 4 unit property, SB 458 will apply for junior liens (SB 931 already applies for 1st liens).  It doesn’t mean however, that you won’t have any tax liability for choosing a short sale. Just keep in mind that foreclosure most likely will result in a higher tax liability.

For any seller reading this post: consult with your attorney on how SB 458 will affect your short sale or decision to short sell your home.

Tagged with: cash contribution • heloc • liability • lien • promissory note • SB 458 • SB 931 • SB458 • SB931 • short sale

Filed under: short sale

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