In a major victory for REALTORS®, Governor Brown signed into law today a C.A.R.-sponsored bill, Senate Bill 458, prohibiting a deficiency after a short sale for one-to-four residential units, regardless of whether the lender is a senior or junior lienholder. Effective immediately for transactions closing escrow from this day forward, both senior and junior lienholders cannot require a borrower to owe or pay for a deficiency in a short sale. This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units. Any purported waiver of this rule shall be void and against public policy.
Although a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval, the new law does not prohibit 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, agents, relatives, and the like.
Exceptions to the new law include a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, LLC, limited partnership, or political subdivision of the state; a lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.
BofA to Accept Back Up Offers on Short Sales
Bank of America announced this week it will accept back-up offers on short sales and will allow the back-up offer to take over if the first buyer does not complete the transaction, without requiring the process to start again.
Under this new guidance, agents will no longer have to initiate a new short sale in Equator if the original buyer walks away from the transaction. Instead, the agent can continue with the original transaction in Equator and work with the same short sale specialist. The file will remain open and the paperwork that has been submitted will remain active. However, the buyer’s qualification and the offer price will need to be reviewed again if a back-up offer is used.
This new process applies only if there’s an available back-up offer when the original buyer does not follow through with the transaction. If a back-up offer is not ready to be submitted, the short sale will be declined. In that case, agents should return to marketing the property and initiate a new short sale in Equator once another offer is received.
Lenders Who Hold Both 1st & 2nd Trust Deeds May Not Sue For Deficiency If They Foreclose Non-Judicially on First
In the days of easy money, many people purchased homes with little or nothing down. During the golden years of appreciation, many banks were offering “piggy back” loans, which included an 80% Loan to Value Loan representing the First Deed of Trust, and a 20% Loan, secured by a Home Equity Line of Credit (HELOC), or Second Trust Deed. Many of these properties are under water now and have no equity.
If the Bank who holds the first trust deed and the bank who holds the second trust deed are the same, if the lender decides to foreclose on California property, non-judicially, the foreclosure on the First Deed of Trust, would normally wipe out the second deed of trust, making the second deed of trust a “sold out junior lienholder”. Under California Law, a sold out junior lienholder is normally able to to sue the borrower directly on the note, because the security has become worthless. (Unless the loan was a purchase money loan). However, in 1992, the Appellate Court in California, in Simon vs. Superior Court 4 Cal.App.4th 63, held that where the lender is the same, who holds the first and second deeds of trust, by foreclosing the first deed of trust non-judicially, this precludes the lender from then seeking a deficiency judgment against the borrower on the second deed of trust. The rational is that under the one-action rule, once the bank makes an election to take the property to satisfy the debt, it is precluded from suing the borrower for a deficiency. If the lender wants to recover a deficiency, it must bring a judicial foreclosure
action. This case can be successfuly used negotiating short sales by short sale negotiators to get the bank to release the second deed of trust for a nominal payment.