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Short Sale Update

Short Sale Update
New State Law – Help or Hindrance
By Ron Pfleger, California Mortgage Advisors, Inc.

With little fanfare, state bill SB458, was signed into law on July 15 to encourage short sales and lend a much-needed hand to the depressed real estate market.

A short sale occurs when a property is sold for less than the outstanding balance of all real estate loans against the property. With property values down in many markets, a short sale is often the only hope many home sellers have when their property values have dropped below the amount of their mortgages. Short sales are often a better option than foreclosure, netting more proceeds to the lender and having less long-term negative impact to a homeowner’s credit rating. And the short sale process is often faster than a foreclosure.

Many homeowners attempting to sell their homes today have both a first and second mortgage, like an equity line on their home. This often creates a problem if different lenders hold the first and second mortgage. Both must agree to the short sale and often the holder of the second mortgage reserves the right to seek a deficiency judgment against the seller when they are not repaid in full.

State law SB458 was written to address this issue and protect the home seller. Under the new law, when the holder of a junior lien (such as a home equity loan or line of credit) agrees to a short sale in California, it gives up its right to pursue a deficiency judgment – or to sue the borrower for any unpaid balance in court. The new law does not however require the junior lien holder to approve the short sale, and if it doesn’t and the home goes into foreclosure, it can still pursue a deficiency judgment.

While this new law was written to encourage short sales and was even sponsored by the California Association of Realtors, it is actually having the opposite effect when different lenders own the first and second liens. At some point SB458 may need to be amended or reversed if too many junior lien holders refuse to cooperate with a short sale. While they may not come out any better with a foreclosure they at least keep their option open to attempt to collect.

SB458 is a perfect example of a well-intentioned law not thoroughly thought out prior to enactment that may ultimately harm those it set out to help.

Ron Pfleger, MBA is a licensed California Real Estate Broker affiliated with California Mortgage Advisors, Inc. He may be contacted at 707-933-8100 or email at rpfleger@calmtg.com.