SB 931 Passes: NO Short Sale Deficiency Judgements on First Trust Deeds in California

Well, I have good news and bad news.

The good news is that because Senate Bill 931 was signed by the governor, starting January 1, 2011, a seller's first trust deed lender cannot obtain a deficiency judgment against the seller after a short sale. Providing written consent to a short sale shall obligate the first trust deed lender to accept the sales proceeds as full payment and discharge of the remaining amount owed on the loan. This law applies to first trust deeds secured by one-to-four residential units, but does not limit the lender from seeking damages for "fraud" or "waste" by the borrower. This is good news for folks in the Sacramento area looking to do a short sale on their homes. This legislation adds 580e to the California Civil Code. It reads;

"SECTION 1. Section 580e is added to the Code of Civil Procedure, to read:

580e. (a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the
remaining amount of the indebtedness on the first deed of trust or first mortgage. (b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste. (c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state."

The bad news? Governor Schwarzenegger vetoed Senate Bill 1178, which would have extended California's anti-deficiency protection to non-"cash out" refinance loans as well. I'm sure the California Association of Realtors will again attempt to get this sort of legislation passed in the next session.