Senate Bill 458 (SB458) and Senate Bill 931 (SB931)
Governor Jerry Brown signed into law Senate Bill 458 (SB458) on July 15th, 2011. This bill expands the anti-deficiency protection to all second lien residential mortgages on 1-4 unit properties. The bill prevents second mortgage holders from pursuing a borrower after the closing of a short sale for the remaining balance on a loan. (One important item to note is this does not protect someone who goes through foreclosure.) Junior lenders such as a second or third mortgage, including HELOCs can no longer pursue a deficiency after a short sale.
This bill became effective as soon as it was signed due to the urgency clause placed in the bill.
California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lien holders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
Senate Bill 458 is an extension of the current bill (Senate Bill 931) that was signed into effect in October of 2010. SB931 only prohibited the first lien holders from pursuing a deficiency judgment following a short sale.
The new law also bars any short sale lender from requesting or requiring any contribution from the seller. Lenders have had two paths to get sellers to share the deficiency: Recourse after the short sale and Contribution at the short sale closing. January’s SB 931 stopped recourse for first lenders; Friday’s SB 458 stopped recourse for junior lenders and stopped all contribution.
Prior to the signing of Senate Bill 458 (SB458) it was possible for a homeowner to complete a short sale, only to after have the second lender come after them for them for the balance. We heard of countless stories of inexperienced agents leaving their clients responsible after the close. In these cases, the sellers would close on a short sale with the deficiency language in the letter saying the bank had the right to pursue them. This is why it is so important to make sure you have an experienced agent negotiating your short sale. Even with the new laws in place.
It is going to be interesting to see how second lien holders handle short sales with the new bill in place. We have spoken with fellow Realtors and attorneys about the bill and the response is mixed. While we feel the goal of the bill is fantastic, there are concerns as to how this will affect the bank’s position. Lien holder still has absolute authority to decide whether to accept a short sale or not, and is not required to accept a short sale. If the lien holder is no longer able to require a contribution from the seller AND must release their deficiency rights, will they begin forcing more sellers into foreclosure in order to retain their deficiency rights? This is why it is so important to have a strong negotiator on your side when doing a short sale.
The Big Question With Senate Bill 458 is: Can the Lender Require A Seller To Bring In Funds Over the Sale Price?
As it often is with law, the answer to this question depends upon how you frame the facts. In the bill, the statute specifically prohibits a note holder from requiring additional compensation from the seller:
“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.C.P. section 580e(b)
But… According to CAR, the above provision does not prohibit a homeowner from “voluntarily” offering additional monies to the lender with the hopes that a lender will agree to a short sale. A lender may also negotiate for a contribution from someone other than the borrower, such as other lenders, agents, and relatives.
Speaking with our attorneys, escrow, title and other realtors, we have not been able to get any clarification on this. On the Monday following the signing of SB458, Wells Fargo renegotiated ALL of their California second mortgages that were approved and were requiring the seller to bring in funds. We received the call from all of our negotiators asking for changes to our HUDs so the files could be re-approved.
While the answer to the question is still up in the air, Wells Fargo has taken the position that the seller can no longer contribute any funds. This is big news, since Wells almost always required some form of seller contribution.
What Kind of Properties Qualify for Protection under the amendment to C.C.P 580e under SB 458:
This deficiency judgment prohibition applies to a broad category of 1 to 4 residential units with exceptions noted below. It applies to:
•Cash-Out Refinanced loans
•Non-Owner Occupied Homes
Are There Exceptions to C.C.P. section 580e? (SB 458):
Section 580e does not apply in the following circumstances:
•Where debtor is a corporation, limited liability company, limited partnership, or political subdivision of the state. C.C.P. 580e( d)(1).
•Where debtor engages in fraud in the sale or waste of the property C.C.P. 580e( c).
•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. C.C.P. 580e(d)(2).
•For other exceptions that may apply to your specific factual scenario, speak to a lawyer.