Short Sale Anti-Deficiency Protection now Extended to Junior Lienors. Can’t waive the Protections.

To: All SLG Clients and Affiliates
Re: CLIENT ALERT: July 16, 2011

Note and Disclaimer: This is a general advisement. This is a new law. This area of law changes rapidly and new laws are introduced regularly on this subject. You should review any decision you make on the issues raised in this advisement with counsel experienced in this area of law.

SB 458 (Short Sale Anti-Deficiency Legislation): Passed as an urgency bill and approved by Governor Brown on July 11, 2011 and Chaptered by the Secretary of State on July 15, 2011 , amends CCP §580e.

Background: Lenders often question whether the acceptance of a short sale removes the rights to seek a deficiency or require a payment or other collateral as a condition of a short sale.

Prior legislation (SB 931 adding CA. Code of Civil Procedure § 580e (effective 1.1.11)), prohibited deficiency judgments by the senior lienor if there was a short sale that was approved by the senior. There was no definitive guidance on whether you could get a waiver from the borrower i.e. allow the short sale but reserve the right to a deficiency against the borrower or to take other collateral of the borrower (by either the senior or junior which allowed the sale). It was assumed that since SB 931 specifically referenced senior lienors only, that any junior that was entitled to a deficiency could seek one, unless the borrower obtained the waiver of the junior, as part of the short sale transaction. SB 458 seeks to resolve this issue by providing that if the senior and junior agree to the short sale, that is it. No “side payment” allowed, no waivers. Some people believe this may make it even harder to get short sales through in California, extending the housing crises for a longer period of time. I think so.

a. The Bill applies to 1-4 unit properties and to second mortgages too.[1]

b. If a junior lienor approves the sale, it will have to write off anything that the senior does not allow to go to the junior.

c. Bill provisions do not apply if the borrower is a corporation, LLC, LP, or political subdivision of the state.

d. In essence, the acceptance of a short sale would be the equivalent of a full credit bid at foreclosure.

e. Fraud and waste claims are excluded.

f. The bill makes any waiver of the provisions void as against public policy[2].

i. Note the language in footnote two. It could be argued that there is no specific prohibition on obtaining a further note or promise to pay. However, the clear intent of the Bill is to prohibit such practices.

g. The bill is deemed “urgency legislation” and takes effect immediately when bill is enrolled

Contact: Spencer Scheer if you wish to discuss.

[1] The bill previously proposed extending existing anti deficiency protection re purchase money loans to include not only the original purchase money loan amount, but to clearly specify that the protection applies to refinances of that loan and also to any other proceeds used to improve the Property, using. 26 USCS § 163: B) to define “acquisition indebtedness, but this provision was removed by amendment as of May 1, 2011.

[2] The bill provides in pertinent part: “ 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 ofthe sale, in exchange for the written consent to the sale”,