California Short Sale Law Changes For Second Loans
A new law went into affect July 15 of this year, SB 458, concerning short sales, and the junior loans (seconds, thirds) on those short sales. Since 2010, if a bank who had the first agreed to the short sale, they could not come after the seller after the closing for a deficiency judgement(SB 931). SB 458 is almost the same law, except for junior loans.
Typically, in a short sale with 2 loans, the first usually offers $1000-$3000 to the second to agree to the short sale. The second, unless there was settlement language that included that the loan was paid in full, and there would be no deficiency judgement, would reserve the right to come after the seller later for the remaining money owed. Sometimes they would require a seller to sign a promissory note for the difference of what they were getting and what was owed. The second loans are almost always the hardest part of a short sale. Most sellers will not agree to additional monies owed, when they won’t even own the home.
SB 458 now extends the law towards junior lien holders. If the junior lien approves the short sale, they can not come after the seller for a deficiency judgement or a promissory note.
Now before everyone gets all excited about this new law, in my opinion there are some possible side effects to this law. I think the banks that have junior liens, may just decide not to do short sales. If the home they have a second on, is foreclosed on, they can still go after the owner for the money owed. If they agree to the short sale, they get the $1000 – $3000 and that is it. If sellers are lucky, the first will decide it is worth it to offer more than they have in the past to the junior lien holders. It is too soon to see how the banks are going to react. I have heard of two short sale approvals that were approved, were pulled because of the new law.
Whether you are a buyer or a seller, if you are dealing with a short sale junior lien, I advise patience. This will probably slow down and stall the process for a while, during which time the banks will be deciding how to deal with the new law.