New Law provides Anti-Deficiency Protection For Borrowers Short Sale Homes

On October 1, 2010

Governor Schwarzenegger signed California Senate Bill 931 into law.  This new law adds Section 580(e) to the California Code of Civil Procedure.  While this is great news for borrowers insisting on a short sale, it only applies to the first mortgage.  Existing law, CCP 580(d) does not allow a deficiency for a property foreclosed on by the lender that did the foreclosure.  Many times lenders would insist on the right to seek a deficiency when they agreed to a short sale.  That would substantially alter the rights of the borrower under CCP 580(d).  Many borrowers would halt the short sale because of this provision.  Now the lenders cannot add the provision

Warning! This new law does not affect a junior lien holder (Second Mortgage).  That means that the anti-Deficiency Laws that did not apply to Junior Liens (Second Mortgages) are not changed by this new law.  If you have a second mortgage (or a junior lien) before you sing any short sale documents you should consult with an attorney to ensure you make an informed decision based on accurate information.  That does not mean that you cannot negotiate with the junior lien holder to eliminate a deficiency.  Contractual rights are negotiable between the parties and in some cases junior lien holders are willing to completely release the borrower if the circumstances meet the criteria established by the lender.

If you are in a situation where you may lose your home, you should explore all of your options, including short sales, foreclosure, and bankruptcy.  In many situations a home can be preserved through a bankruptcy.  Chapter 13 allows the borrower to make up the past due payments over time.  If keeping your home is important to you then you should seek competent legal advice.

The new law is shown below for illustration purposes below.
580e.  (a) 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.
(b) 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 first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.