If I Sell My Home in a Short Sale, Will the Bank Pursue Me for the Difference?

I am happy to quickly say, as of July 15, 2011, not any more. Here’s why –

Last year the Legislature passed Senate Bill 931 adding Section 580e to the California Code of Civil Procedure and stating that the senior lien holder could not pursue a deficiency judgment after a short sale which they had previously approved. The law equally applies to purchase money, hard money and refinance - as long as there was no cash out.

However, although the passage of the bill was a great victory for homeowners, it left a few items undetermined and unsettled. Questions such as “What about the junior lien holder?”, “What if a borrower’s short sale closed prior to that date, was it retroactive?”, and “Does the law apply to investors?”

This year the Legislature passed Senate Bill 458, amending Section 580e and extending the protection of SB 931, by making it applicable to junior liens as well. In addition to not being able to get a deficiency judgment it provides that after a short sale, no deficiency shall be owed or collected and no deficiency judgment shall be requested or rendered provided the short sale closed escrow and the lender was paid the amount they agreed to accept.

So what does this mean in lay man’s terms? Although the law does not specifically say so, it is likely the courts will interpret that section to mean that it applies to a short sale closing either before or after July 15, 2011, the effective date of the new section – making it retroactive. That analysis, according to attorney Dave Tanner with Hanson Law Firm, is based on the provision that the short money cannot be collected and no deficiency can be requested. It also applies to investment owned properties up to 4 units, and will bar lenders from turning these loans over to a collection company which some lenders were doing even though the earlier section barred a deficiency judgment.

The amended law further provides that the holder of a note shall not require the seller to pay any additional compensation, aside from the proceeds of the sale, in exchange for their consent to the short sale.

The remaining question is whether this law will protect the seller from liability after a short sale or whether it will lead lenders to denying short sales in favor of pursuing foreclosure where a deficiency of a junior lien can still be pursued.

That question, as well as an industry question, how the law will affect other parties of the transaction, title companies and real estate agents, as it pertains to the junior lien holders attempting to usurp the law and collect on the deficiency, remain to be seen. Because the probabilities exist, we are certain to hear more about them in the very near future.

If you have any questions or are considering a short sale and want to discuss your options, feel free to contact me at (916) 678-1803 or visit my website at www.SheSoldItForMe.com. For real estate law advice, contact the Hanson Law Firm at (916) 447-9181 or log on to their website at www.HansonLawFirm.com

The majority of the information contained in this article came from excerpts shared by Dave Tanner of Hanson Law Firm on August 26, 2011 at the monthly Sacramento Association of REALTORS industry update meeting.