The California legislature last year passed senate bill 931, which became Code of Civil Procedure section 580e, effective January 2011. It provides that when a residential lender in the first position (i.e., the deed of trust recorded first in time) approves in writing a short sale, the lender cannot later seek payment for the unpaid loan balance. A short sale is one in which the lender agrees to accept less then the balance due to release the property from the deed of trust by recording a reconveyance of the deed of trust.
The purpose of this was to solve the problem of ambiguous short sale agreements in which the unsuspecting former homeowner could find themselves subject to the lenders efforts to collect the balance. Presumably the new law has not had much impact on the pace of short sales, as the savvy lender, and homeowner advised by an experienced real estate attorney, know that if the owner walks away from the property and the lender holds a trustee's sale (foreclosure by the power of sale), the lender could not get a deficiency judgment, so in agreeing to the short sale the lender avoids the time and expense of foreclosure.
New proposed legislation, SB 458, proposes to do the same thing for ALL loans secured by a deed of trust against the property- first, second, and whatever. Thus, the home equity lender will only approve a short sale if it is willing to write it all off, except the $3-4,000 that the first lender may allow it to receive. Especially galling is the following language, added in the May 16, 2011 amendment:
" (b) A holder of a note shall not require the trustor, mortgagor,
or maker of the note to pay any additional compensation, aside from
the proceeds of the sale, in exchange for the written consent to the
Often, a second lender will require the seller to contribute some cash to approve the sale. This proposed law does not allow it. It ties the hands of the junior lenders. I believe this will severely reduce the number of short sales approved in California, and boost the number of foreclosures. As I noted in a March blog post concerning foreclosures and the housing crisis, the country is now only 25% through the housing crisis. This legislation will help ensure the continued decline of the California real estate market.