If you’re a California homeowner contemplating or in the process a short sale, here is some great news!  On Friday July 15, Governor Brown signed into law Senate Bill 458 which prohibits a deficiency after a short sale for any 1-4 unit residential properties, regardless of whether or not the lender is the senior or junior lien holder.  This means that neither the 1st or 2nd mortgage holder can demand that the homeowner pay for any deficiency, nor can they file a deficiency judgment.  The law became effective on the 15th and applies to all escrows closing from that day forward. 

This is a huge relief for homeowners facing a short sale.  Up to this point, it was often the practice for a lien holder to file a deficiency judgment or request payment of thousands of dollars, prior to allowing the short sale escrow to close.  This was particularly true for 2nd lien holders who seldom recoup any money from the actual sales proceeds.

The new law however, does not prohibit lenders from negotiating for payment towards the deficiency from other interested parties such as relatives, buyers, and agents.  It also allows a homeowner to voluntarily make a contribution in the hopes of gaining a short sale approval.

As 2nd lien holders will no longer be allowed to demand compensation from the homeowner, my bet is that we will see an increase in the number of requests for payment by 3rd parties…especially the buyer and the agents.  So while this law is great news for homeowners in terms of avoiding recourse, it may present new challenges in negotiating approvals that are fair to all parties. 

Please feel free to contact me with any questions about this new law or subscribe to stay on top of the latest short sale news.

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