This topic never dies. In fact, it just keeps getting more interesting. On January 1, 2011, new California Code of Civil Procedure (“CCP”) §580e went into effect. Here is the actual text of the statute:
(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.
(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.
As statutes go, this is a model of clarity: There is nothing ambiguous about it at all. It means this:
First, if the lender on a first mortgage approves a short sale, then it CANNOT proceed against you later for a deficiency between the value of the property and the loan balance. Ever. This is not instead of CCP §580b (purchase money deficiency prohibition), or CCP §580d (non-judicial foreclosure deficiency prohibition), it is just another mechanism for accomplishing the same result, albeit under different circumstances. Because §580b already applies to purchase money loans, this new statute will apply only to refinance loans. So if your first is still the same loan you obtained when you bought your home, this statute doesn’t apply because you don’t need it. You’re already protected by §580b.
Second, it does NOT apply to junior liens. So just because the first is barred, the second isn’t. In which case you MUST make sure you get a complete release. (See below.)
This came about because some lenders were keeping their fingers cross behind their backs when they approved shorts sales, saying they’d accept less than 100% of the outstanding loan balance, but then coming after the borrower after close of escrow for the deficiency. Thus, you always, always, always have to make sure that you read your approval letter carefully and thoroughly, and that if there is anything in there that you don’t understand or that makes you nervous, get advice!
My mantra for all short sales is not to agree to anything until you get a full and complete release from all lenders. What is a release? It’s a contract, or a provision in a contract, that provides that the parties completely release each other from all claims under any theory, specifically that the bank is relinquishing any and all rights to further repayment of the subject loan (i.e., the deficiency) upon receipt of the agreed amount. This isn’t a complex concept, but if you are not completely comfortable, then you need to spend the time, energy and yes, maybe a few dollars, to make sure you’re getting what you think you’re getting. So what if you pay a qualified real estate lawyer $300 for an hour of their time to read your docs? It’s a form of insurance policy against the risk that you’re going to spend years and perhaps thousands of dollars fighting for what you incorrectly thought you’d gotten in the first place. Most intelligent legal protection and lawyering is of the “ounce of prevention” model, but the most lucrative lawyering is the “pound of cure” model. You can pay $300 to $500 avoiding this problem altogether…or $5,000 to $10,000 fixing it later when the bank that you mistook for bunny rabbit morphs back into the viper you thought you’d left miles back in your rear view mirror. Banks are patient and they have no conscience. Remember the statute of limitations ion a written contract in California is four years.
Last, make sure that you don’t buy into the myth that just because something is law, your lender understands it or can be counted on to apply it properly. I am hearing tales of banks approving short sales but still attempting to reserve their right to pursue a deficiency after close of escrow. Even with the new §580e in place. Read your docs. If you don’t, you’re courting disaster. In addition to lacking conscience, and being patients, banks as entities aren’t very intelligent. Bankers as individuals may struggle against that type, but only a fool counts on that. As a lawyer I worked with a long time ago used to quip, the only requirements for becoming a banker are a clean white shirt and a full head of hair. I think the standards are more relaxed than that now.
For prior posts on short sales, check out my post Are Short Sales Worth the Hassle? For more on the basics of California anti Deficiency rules, check out California anti-deficiency rules and statutes: When can a mortgage lender in California recover a deficiency after foreclosure?