Short Sale Deficiencies

 New California law enacted during 2010 was Senate Bill 931, which generally prohibits a deficiency judgment after a short sale for first trust deed lenders of one-to-four residential units.

The following charts are reference guides to determine the general applicability of anti-deficiency rules for short sales and foreclosures.  These charts do not cover all aspects of any individual case or situation.

 Short Sale Deficiencies Fact Sheet
General Rule Unless otherwise exempt, no judgment shall be rendered for a deficiency for a first trust deed lender of one-to-four residential units if the borrower sells for less than the amount owed with the lender’s written consent. A first trust deed lender’s written consent shall obligate the lender to accept the sale proceeds as full payment and to fully discharge the remaining debt on the first trust deed.
Effective Date January 1, 2011
Applicability First deed of trust for a dwelling of not more than four units.
Exceptions Exceptions include:

  • Junior liens
  • Lender seeking damages for fraud or waste;
  • Borrower is a corporation; or
  • Borrower is a political subdivision of the state.
C.A.R. Standard Form C.A.R.’s Short Sale Information and Advisory (Form SSIA) paragraph 4A2 discloses this law to sellers and buyers.
Practice Tip Regardless of the law, it would be prudent for a borrower to obtain the lender’s agreement to release the borrower from liability for the balance due on the note in writing and signed by the lender.
Legal Authority The full text of SB 931, which adds section 580e to the California Code of Civil Procedure, is available at http://www.car.org/legal/2011-new-laws/.
Short Sale v. Judicial Foreclosure
Homeowner (1 to 4 units) Generally Protected Against Deficiency
Type of Loan After Short Sale After Judicial Foreclosure*
First Trust Deed  Yes Yes, if purchase-money and owner-occupied
Second Trust Deed  No Yes, if purchase-money and owner- occupied
Purchase Money Loan  Yes  Yes, if owner-occupied
Rate-and-Term Refinance  Yes  No
Cash-Out Refinance  Yes  No
Owner-Occupied Home  Yes  Yes, if purchase money
Nonowner-Occupied Home  Yes  No

Certain exceptions may apply, including wiped-out junior liens, fraud, and bad faith waste.  Also no deficiency judgment shall be rendered if a lender forecloses by trustee’s sale (CCP § 580d) or if a loan is seller-financed (CCP § 580b).

See C.A.R.’s legal article entitled Deficiency Judgments and California Law, available for C.A.R. members at http://qa.car.org.

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Source is California Association of Realtors and this is for information only and not the providing of legal or tax services.  If you have a question about your own short sale deficiency situation, whether a lender can sue you before or after short sale or foreclosure, you should contact an attorney.

Thank you. 

By Harrison K. Long – Professional real estate representative, REALTOR and broker associate, HomeSmart Evergreen Realty – 949-701-2515 (phone) –   ExploreProperties@gmail.com – CALBRE #01410855 – Now serving as an appointed director at the California Association of Realtors – also an attorney member of the California State Bar association #69137

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