I have blogged several times in the past on the “the wisdom of short sales,” starting with complete opposition to the notion in “Are Short Sales Worth the Hassle” and softening my position a bit in my post last December called “Rethinking Short Sales…” Then effective in January of this year, the California State Legislature passed some new anti-deficiency legislation prohibiting first mortgage lenders who have approved a short sale from pursuing any deficiency on the balance. I wasn’t impressed with that, as it didn’t seem do actually do much to help people in the final analysis. Who cares about the first if you get sued on the second? Remind me what the point of that exercise was again?
For a variety of reasons, first mortgage lenders pursuing deficiencies is rare in California, but since I’ve already gone in exhaustive detail on how California anti-deficiency statutes work in these posts: “California anti-deficiency rules and statutes: When can a mortgage lender in California recover a deficiency after foreclosure?”; “Second Mortgages in California: Deficiencies Not Usually an Issue” and “California Mortgage Deficiencies: What is a Purchase Money Security Interest?” I won’t reprise that here. But these posts remain the most visited pages on this website, so if you think you have a deficiency problem, these links may help you.
But I digress.
Earlier this year, the California legislature–one of the few that still seems consumer friendly–extended those short-sale anti-deficiency restrictions to all lienholders who approve short sales. What does this mean? It means any lender that approves a short sale is statutorily prohibited from coming after the borrower later for a deficiency. Refis, seconds, thirds, HELOCs, so-called 80/20 seconds, home improvement loans, etc. Bring ’em on. If the lien-holder approves the short sale, no deficiency. It’s the law! It’s codified in CCP 580e. But beware: The lender must approve the short sale or the statute won’t apply. (Of course, if you think about it, that’s sort a non-issue: The essence of a short sale is such that it’s impossible if any lien holder withholds approval.)
Also, this only applies to California property. Lenders are still playing games in other states–here in the Western States–most notoriously Arizona. I call this the game of “Bankers Keeping their Fingers Crossed Behind their Backs,” [see clever illustration above] as they give you an approval with one paragraph and stick it right back at you with the other. To put it nicely, it’s unscrupulous. Is it legal? Well, in places like Arizona it is. But not in California any more.
Read your short sale approval letter very carefully. What you’re looking for is language that states either that the bank is “waiving” any deficiency, or that you are expressly “released” from further liability on the loan. If you think you might be seeing that language, but are not sure, call a lawyer for pete’s sake. It’s worth a few hundred dollars to sleep peacefully at night. (And don’t complain about your lawyer wanting to get paid for that opinion: She’s putting her reputation, personal fortune and insurance coverage on the line in giving you that comfort.)
I still don’t like short sales. For a lot of reasons. But at least this eliminates one of the nastier and unexpected side-effects here in the Golden State.