Short Sale Deficiencies

March 2, 2011 by  
Filed under Short Sale Deficiencies

Short Sale Deficiencies

The California Legislature recently enacted Senate Bill 931 generally prohibiting a deficiency judgment after a short sale for first trust deed lenders of one-to-four residential units.  The following charts are easy-to-use reference guides for REALTORS® and their clients to determine the general applicability of anti-deficiency rules for short sales and foreclosures.  These charts do not cover all aspects of any individual case or situation.

Short Sale Deficiencies Fact Sheet


General Rule

Unless otherwise exempt, no judgment shall be rendered for a deficiency for a first trust deed lender of one-to-four residential units if the borrower sells for less than the amount owed with the lender’s written consent. A first trust deed lender’s written consent shall obligate the lender to accept the sale proceeds as full payment and to fully discharge the remaining debt on the first trust deed.

Effective Date

January 1, 2011

Applicability

First deed of trust for a dwelling of not more than four units.

Exceptions

Exceptions include:

  • Junior liens
  • Lender seeking damages for fraud or waste;
  • Borrower is a corporation; or
  • Borrower is a political subdivision of the state.

C.A.R. Standard Form

C.A.R.’s Short Sale Information and Advisory (Form SSIA) paragraph 4A2 discloses this law to sellers and buyers.

Practice Tip

Regardless of the law, it would be prudent for a borrower to obtain the lender’s agreement to release the borrower from liability for the balance due on the note in writing and signed by the lender.

Legal Authority

The full text of SB 931, which adds section 580e to the California Code of Civil Procedure, is available at http://www.car.org/legal/2011-new-laws/.


Short Sale v. Judicial Foreclosure
Homeowner (1 to 4 units) Generally Protected Against Deficiency


Type of Loan

After Short Sale

After Judicial Foreclosure*

First Trust Deed

Yes

Yes, if purchase-money and owner-occupied

Second Trust Deed

No

Yes, if purchase-money and owner- occupied

Purchase Money Loan

Yes

Yes, if owner-occupied

Rate-and-Term Refinance

Yes

No

Cash-Out Refinance

Yes

No

Owner-Occupied Home

Yes

Yes, if purchase money

Nonowner-Occupied Home

Yes

No

*Note: Certain exceptions may apply, including wiped-out junior liens, fraud, and bad faith waste. Also no deficiency judgment shall be rendered if a lender forecloses by trustee’s sale (CCP § 580d) or if a loan is seller-financed (CCP § 580b). See C.A.R.’s legal article entitled Deficiency Judgments and California Law, available for C.A.R. members at http://qa.car.org.


This chart is just one of the many legal publications and services offered by C.A.R. to its members.  For a complete listing of C.A.R.’s legal products and services, please visit www.car.org.

Readers who require specific advice should consult an attorney.  C.A.R. members requiring legal assistance may contact C.A.R.’s Member Legal Hotline at (213) 739 8282, Monday through Friday, 9:00 a.m. to 6:00 p.m. and Saturday, from 10 a.m. to 2 p.m.  C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739 8350 to receive expedited service.  Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/.  Written correspondence should be addressed to:

CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020

*** This information has been provided by the California Association of Realtors legal department. Housing Assist of America does not offer tax or legal advice and recommends homeowners to consult with their tax preparers and attorneys before making any decision regarding their properties.

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