California SB 458 – What Does It Really Mean for California short sales ????

Gov. Jerry Brown recently signed SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.

Under previous law (SB 931 of 2010), if a first mortgage holder accepted an agreed-upon short sale payment as full payment for the outstanding balance of the loan, they could not pursue a deficiency judgment,but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.

Many have welcomed this new law thinking that it eliminates the problem of property owners having expossure to deficieny judgments for junior liens after a short sale or will prevent the junior lender from negotiating an additional settlement amount other than just the sale proceeds in order to agree to a short sale.

While it is true that under SB 458 if a junior lien holder agrees to a short sale that they waive any future deficiency judgment, there is nothing in the law that compels the lien holderto agree to the short sale. Although the law statesthat the “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 sale “, this does not mean that the junior lender must agree to the short sale if they believe that they would benefit by letting the first lender foreclose and then pursue a deficieny judgment.

There is also nothing in the new law that prohibits a borrower from “voluntarily” offering a monetary contribution to a lender in hopes of obtaining a short sale. A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, the buyers, agents, relatives, and the like.

I do not see this new law changing much of the negotiation process between home owners and their lenders.