On July 15, Governor Brown signed into law a measure which deals with a substantial issue concerning “upside down” residences in the Golden State . The law, known as Senate Bill 458, precludes junior lenders who approve short sales with homeowners from later pursuing those parties for the remaining loan balances (as unsecured debt). Therefore, irrespective of the wording of the short sale paperwork, there is no recourse after a short sale for this specific group of loans.

SB458 is the second prong of the legislature’s effort to avoid a “double whammy” for distressed homeowners -- that is, losing their homes and still having ongoing obligations (as well as bad memories) keeping them from getting a “clean start.” The first prong was SB931, enacted within the last year, which provided the same kind of debt elimination for first priority mortgages which are resolved by short sales.

SB458 was strongly supported by the California Association of Realtors (“CAR”). In fact, CAR’s current president Beth L. Peerce described the result of the new law as follows:

“SB458 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 [loan] payments on the property.”

This legislation has the effect of making the consequences of short sales quite similar to that which occurs as to nonjudicial foreclosures where the completion of the trustee’s sale bars any deficiency on the debt secured by the foreclosed trust deed. That has been part of California ’s antideficiency laws under Code of Civil Procedure Section 580d (“CCP 580d”) for nearly 80 years. A significant distinction, however, is that the short sale legislation pertains only to one to four family, owner occupied property while CCP 580d governs as to all types of real estate.

Will Sellers who have been hesitant to proceed by way of short sales now feel fully comfortable with the concept? Will junior lenders now categorically reject approval of short sales? Will this new law help stimulate home sales, which have been less than robust for some time, or have the opposite effect?

The Joe Cobert Report will keep you informed.

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