New California Law Helps Short Sellers

There has previously been considerable uncertainty following a short sale as to whether or not the lender who consented to the short sale could later sue the borrower for a deficiency (the difference between the amount owed on the loan and the amount the lender received). In the lender's typical consent to the short sale, the lender did not waive the potential deficiency but instead reserved any rights it had to under the law to pursue a deficiency.

This uncertainty has been resolved by the California Legislature.

On Sep. 30, 2010, the Governor signed into law Senate Bill 931, which went into effect on Jan. 1, 2011 with respect to lenders holding first mortgages. On July 15, 2011, the Governor signed into law Senate Bill 458, which went into effect on July 15, 2011 with respect to all mortgages. The law essentially provides that a lender holding a mortgage on a residential property of less than four units cannot recover additional funds from a noncorporate borrower following a sale of the property where the lender, consents in writing to the sale of the property for less than the amount owed on the first mortgage. The lender furthermore cannot require the borrower to pay additional compensation in order to secure the lenders consent to the short sale.

This law has been codified in new California Code of Civil Procedure section 580e, which provides:

§ 580e. Deficiency collection and judgment following short sale with consent of trustee or mortgagee prohibited; circumstances; exception for fraud; non-application of section; waivers void and against public policy.

(a)(1) No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage, provided that both of the following have occurred:

(A) Title has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located.

(B) The proceeds of the sale have been tendered to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary, in accordance with the parties' agreement.

(2) In circumstances not described in paragraph (1), when a note is not secured solely by a deed of trust or mortgage for a dwelling of not more than four units, no judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage for a dwelling of not more than four units, if the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage. Following the sale, in accordance with the holder's written consent, the voluntary transfer of title to a buyer by grant deed or by other document of conveyance recorded in the county where all or part of the real property is located, and the tender to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary of the sale proceeds, as agreed, the rights, remedies, and obligations of any holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee, or guarantor of the note, deed of trust, or mortgage, and with respect to any other property that secures the note, shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale contained in the deed of trust or mortgage for a price equal to the sale proceeds received by the holder, in the manner contemplated by Section 580d.

(b) A holder of a note shall not require the trustor, mortgagor or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.

(c) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the deed of trust or mortgage, this section shall not limit the ability of the holder of the deed of trust or mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(d)(1) This section shall not apply if the trustor or mortgagor is a corporation, limited liability company, limited partnership or political subdivision of the state.

(2) This section shall not apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidence of indebtedness authorized, or permitted to be issued, by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code).

(e) Any purported waiver of subdivision (a) or (b) shall be void and against public policy.

The changes under these new laws are limited to questions of continued liability under the note following a short sale. There continues to be a real possibility of incurring adverse tax consequences as a result of the short sale, which still must be considered in deciding whether to proceed with the short sale.

Now is the time to contact the Law Offices of Elliott Abrams for a consultation. The cost for a comprehensive analysis of the tax and liability consequences of foreclosure, a short sale or a loan modification is $400 for one property plus $200 for each additional property.