Dave Tanner
With the passage of Senate Bill 931, a new section was added to the California Code of Civil Procedure that should be of great benefit to many short sale sellers. The new CCP §580e provides “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 that 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.”

So what does that mean? According to our friends at https://investorschoicelending.com/ – the short sale seller generally does not need to worry about a deficiency judgment as long as the property being sold is a one-to-four unit residential and is only encumbered by a first deed of trust. Approval by the short sale lender discharges the remaining indebtedness. No need for the seller to negotiate a release of liability from that lender.

But I said generally, so what does that mean? The new law does not affect liability of junior lienholders. A sold out second may still be able to sue on the note. The new law does not apply to loans secured by other types of real property. The short sale seller of a fiveplex is not helped. The only relief is to short sale sellers of one-to four units.

Even if the note is covered by the new law there are still two exceptions. The first is for waste. Waste is a legal term for damage done by a person legally in possession that diminishes the value of the property. A simple example would be a short sale seller who, on the way out, takes out the built-in appliances or strips the lighting fixtures. The lender can still come after them for damages.

The second exception is for fraud. If the short sale seller committed fraud, either through the original loan process or through the process to induce the lender to approve the short sale, the lender will be able to come back against the seller for any loss attributable to the fraud, which in most cases would likely to be found to be the entire unpaid balance.

So most short sale sellers will receive relief from this law, unless it is shown they have committed waste or fraud.

If you have any questions on this article, contact me at Hanson Law Firm at 916 447-9181.