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Can Lenders Come After Me For Deficiency After Close of Short Sale in CA?

by Scott Fuller on July 16, 2011
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SB458 Short Sale Deficiency Judgments 1st and 2nd

*** As always, please contact a quailfied Real Estate Attorney before completing a short sale to understand what legal ramifications may exist for you. This is intended as information only ***

A very common question for people who are considering a short sale is “If I live in CA and do a short sale, can the lender come after me for more money down the road”. Over the last year there has been legislation passed in CA which prohibited 1st lien holders from pursuing deficiency (the amount forgiven by the lender in a short sale). But this didn’t apply to the 2nd lien holder. That has now changed.

As of 7/16/2011, CA Governor Brown passed Senate Bill 458 which prohibits a deficiency after a short sale for 1-4 residential units, for both 1st and 2nd lienholders. Simply put, 1st and 2nd lienholders can not go after CA homeowners for more money after the short sale transaction has closed. This can be great news for many CA homeowners who are concerned that the bank may come after them for more money after closing.

Although lenders for CA loans cannot ask the borrower for money after the close of escrow, they can still ask the borrower for a “seller contribution” as a term of the short sale approval before it closes. Relevant to this, SB 458 also allows lenders to collect a “seller contribution” from someone other than the borrower, such as the buyer, relatives, agents, etc.

The purpose of SB 458 is to relieve the housing market of default inventory through means of a short sales vs foreclosures. The authors of the law felt that if homeowners knew they could not be pursued for any additional money after the close of the short sale, more homeowners would opt for a short sale vs a foreclosure, which in most cases is better for the housing market. One thing that is yet to be seen is the theory that this could potentially backfire. If 2nd lien holders know they can no longer go after a homeowner for the deficient amount after a short sale, they could either ask the seller for a higher seller contribution before the short sale close, or they could simply decline more short sales knowing they could retain more money if it went into foreclosure and they could then pursue deficiencies.

One thing I would remind homeowners of is that although SB 458 could be of great benefit after the short sale closes, it is not a free ticket to assume the lender will just approve the short sale. Negotiations with the lender is still required and they still may ask for a seller contribution or promissory note agreement prior to issuing the short sale approval.

If you have any questions about this or any other short sale topic, contact us!

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