I have recently been getting a number of questions about the new CA short sale law that took effect on July 15, 2011. The law is supposed to make it better for homeowners who are trying to do a short-sale on their houses by not allowing the second mortgage to come back and collect on the note after the sale is made. California had previously passed a bill that applied to first mortgages, but junior lienholders (like 2nd and 3rd mortgages) were not included in the original bill.
What’s the new law?
Before the junior lienholder is considered as having waived its right to seek a deficiency, both of the following must occur:
- The junior lienholder must agree to the short sale; and
- It must receive some payment amount against its loan as “proceeds from the sale” of the property.
What happens if both of the requirements do not occur?
The junior lienholder can still refuse to accept the terms of the short sale. In that case, the first lienholder may then choose to proceed with the non-judicial foreclosure. While the first lienholder will be prevented from seeking a deficiency (because of the one-action rule), the junior lienholder will retain the right to try and collect on the deficiency.
As another alternative, the junior lienholder could just release its lien without demanding a payment, allowing the short sale to proceed. Since the lienholder did not receive any payment from the proceeds of the sale, its right to seek a deficiency judgment would remain.
What’s the bottom line?
Be very careful in negotiating a short sale where there is a junior lienholder. If the 1st and 2nd mortgages are held by the same bank, it may be easier to negotiate a short sale that releases liability for both mortgages. If the 2nd mortgage will not agree in writing to the short sale, the bank retains its right to come after you for the difference after the foreclosure.
This is just a basic overview and is not legal advice specific to your situation. If you are considering bankruptcy or are feeling overwhelmed by debt, you should speak with an attorney in your area for legal advice. To speak with me regarding your situation, please email me at [email protected] or call 925-586-6738.