By: Arlen R. Gunner, Esq.Numerous homeowners have found themselves in the unenviable position of having to sell their homes for less than the amount they owe. This situation is commonly called a short sale. On September 30, 2010, the California legislature provided some initial relief for short sellers who obtained the consent of the First lien holder to the short sale. The law that became effective on that day created a new Section 580(e) to the California Code of Civil Procedure which required that no judgment can be rendered for any deficiency under a note secured by a First deed of trust or First mortgage for a residence in any case where the owner sells the residence for less than the amount owed at the time of sale so long as the written consent of the lender is obtained. Once the lender gives its written consent, it must accept the net sale proceeds as payment in full, and must fully discharge any remaining indebtedness on the First deed of trust or First mortgage. An exception to this rule occurs if the borrower commits fraud or waste with respect to the residence.
This statute, although well intended, did not protect the borrower in situations where the borrower had also placed a Junior lien on the residence. To correct this problem, the legislature passed an amendment to Section 580(e) on July 15, 2011 which expands Section 580(e) to prohibit a deficiency judgment upon all notes secured by deeds of trust or mortgages which encumber a residence. In any case where the borrower sells a residence for less than the remaining amount of all loans, and at the time of the sale it has the written consents of all lenders, then no deficiency judgment can be obtained against the borrower by any lien holder. The bill also provides that when the note is not secured solely by a deed of trust or mortgage on a residence, no judgment shall be rendered for any deficiency if the borrower sells the residence for a sales price less than the amount owed in accordance with the written consent of the lenders. Additionally, the law prohibits the lender from requiring that the borrower pay any additional compensation or consideration aside from the proceeds of the short sale in exchange for the written consent of the lender.
This new Section only applies if the borrower is an individual. It is not available if the borrower is a corporation, limited liability company, limited partnership or a political sub-division of the state. Nor shall this Section apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidence of indebtedness authorized or permitted to be issued by the Commissioner of Corporations or that is executed by a public utility.The provisions of this Section cannot be waived and any attempt to do so will be void as against public policy.
This new statute, as amended, does not change existing law where no deficiency can be obtained in connection with the foreclosure of a purchase money loan or a loan that is secured by deed of trust or mortgage that is foreclosed pursuant to a power of sale.
