Governor Jerry Brown just signed a new California law (SB 458) that will further protect homeowners looking at short sales by ensuring the current lien holder/servicer cannot go after the homeowner after the short-sale closes (usually done in the form of a “deficiency judgment”).
A short-sale is when the bank allows the current home owner, with little to no equity (or even upside-down), to sell their home by accepting a payoff of less than the home is actually worth. All lien holders must accept and approve the short payoff for it to work. Currently about 20%, or 1/5, purchase transactions in California are short sales.
This law adds to some protections already in place (SB 931) that ensures 1st lien holders don’t go after the borrower with a deficiency judgment after the short sale is completed. Of course, that only makes sense. Why would they be allowed to go after the (previous) homeowners AFTER the bank agreed to a short payoff? The new law holds 2nd and 3rd lien holders to the same standard.
“As the economic recession continues to impact Californians, SB 458 will allow homeowners forced to sell at a loss to have closure at the end of the process,” said California state Senator Ellen Corbett (D-San Leandro). “By extending anti-deficiency protection to all loans on a home when a short sale occurs, a homeowner can use a short sale as an alternative to foreclosure or bankruptcy.”
The new law is effective immediately and now prohibits 2nd and 3rd lien holders from pursuing a deficiency judgment after they agreed to a short payoff and the sale closes.