The California residential real estate blogs and media have been enjoying an anti-deficiency “happy dance” the last several days. Is this warranted or will some homeowners suffer unintended consequences by the expansion of the anti-deficiency provisions of CCP 580e to junior liens? In the short term, certainly many lenders will.
In late 2010 the California Legislature adopted, and the Governor signed, a bill creating Section 580e of the Code of Civil Procedure. This new section provided essentially that when a holder of a first deed of trust encumbering a 1–4 unit dwelling approves a short sale that is paid according to its terms then the holder (beneficiary) cannot subsequently pursue any form of deficiency liability against the borrower except in limited exceptions (which will be discussed below).
Last month the Legislature approved SB 458 (SB stands for “Senate Bill”). The Governor signed it as an “urgency measure” on July 11. It was filed with the Secretary of State on July 15, 2011. Most laws are effective on January 1 in the year after they are adopted. An urgency measure requires a super-majority vote and goes into effect immediately. Hence, it is currently effective for all short sales that meet its criteria. (Registered readers can receive a PDF copy of the official version of the new law by opening the preceding article.)
The new law expands the applicable rule to holders of notes secured by deed of trust or mortgage solely encumbering a 1–4 unit dwelling regardless of the priority of the deed of trust or mortgage (the “lien”). Therefore, it applies to second, third and subsequent deeds of trust, including HELOC’s (home equity lines of credit). It does NOT apply if the borrower (technically the trustor or mortgagor) is a corporation, limited liability company, limited partnership or political subdivision of the state, nor to deeds of trust securing bonds, such as public utility bonds.
Prior to 2011 a primary anti-deficiency rule applied primarily to purchase money deeds of trusts encumbering 1–4 unit dwellings that were occupied by the borrower (at least at the origination of the loan). The broader new law applied to vacation homes, rental properties, cash-out refinances, and HELOC’s, among others. It also does not fully apply when one loan is secured by more than one parcel of property, what is often called a cross-collateralized loan.
A short sale works only when all lien holders approve; otherwise, the non-approving lien(s) remains against the property in the full amount of the balance of the applicable debt. For practical purposes, this does not happen. The short sale is only complete, and the new law only applies, when title “has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded . . .” There must have been written consent by the holder of the note for which the procees of sale have been tendered to the note beneficiaries in accordance with the parties’ agreement (the short payoff letter terms).