Released July 15, 2011 By the California Association of Realtors

Gov. Brown on signing SB 458 into law

The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds Gov. Jerry Brown on signing SB 458 (Corbett) into law.   SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.

Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.

“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce.  “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

SB 458 contains an urgency clause making it effective upon signing.

Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with nearly 160,000 members dedicated to the advancement of professionalism in real estate.  C.A.R. is headquartered in Los Angeles.
Existing Law

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

New Law

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.

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. 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.

Benefits

The primary benefit of the expanded law is that, “No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust . . .” In addition, the law provides that a holder of a note shall not require the borrower “to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent of the sale.” Hence, new notes from the borrower and “seller contribution” payments cannot be required. Finally, any purported waiver “shall be void and against public policy.” So even if a lender gets a borrower to sign a waiver of the new law, that waiver is void and cannot be enforced.

Further Exceptions

The new law does not apply if the borrower commits fraud with respect to the short sale. Essentially, if the borrower/seller lies on their short sale application, then their short sale is subject to the laws applicable without this statute. Therefore, a “strategic default” application apparently must disclose the intentional nature of the breach and cannot argue a false hardship.

Another exception applies if the borrower commits waste with respect to the property. “Waste” is essentially intentional or grossly negligent damage to the property. So the seller/borrower cannot rip out appliances, smash windows or holes in walls, ignore leaking roofs, pour cement down the toilets, or similar damages to the property. In those cases, the “holder of the deed of trust or mortgage” is not limited in their ability to seek damages against the borrower.

What if your Primary Lender Forces Foreclosure, what happens to your HELOC?

If your property is foreclosed upon, your primary lender will be paid everything it is owed with the money it takes from the sale. It may also use some of the money for expenses related to the sale of the home. Since the HELOC loan is subordinate to the first mortgage, the HELOC lender will be paid with any remaining money. If the HELOC lender is not paid the full amount owed on the line, the HELOC becomes an unsecured lien collectable via a deficiency judgment. The lien is no longer on the property; instead, the borrower is liable for everything owed. Through the deficiency judgment, the HELOC lender may be able to recoup the money from you by garnishing your wages or even putting a lien on any property you buy in the future. A foreclosure will also show up on your credit report, making it extremely difficult for you to get credit for the next 7 years. In most circumstances, the only way to get out from under this debt is by either paying the judgment (or an agreed amount in compromise) or by discharging the debt in bankruptcy. The  new law makes Short Sales more favorable for those deciding between short sale vs. foreclosure.

Credit Impact: Foreclosure vs Short Sale

A short sale is not a derogatory mark on your credit because credit bureaus do not have the term “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed,” among other categories. Some clients have reported negative FICO score drops from 50 points to 120 points. The point drop is typically due to having been behind on your payments. Lenders will report short sales differently and some do not report them to the credit bureaus at all. Credit scores drop from 200 to 400 points after a foreclosure. Generally, as a foreclosure is a public record, the record of a foreclosure will remain on your credit report for 10 years.

Related Articles

Bill:  http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_458_bill_20110715_chaptered.html

Heloc & Foreclosure:  http://www.bills.com/heloc-foreclosure/