Senate Bill 931 – California Anti Deficiency

What does this mean for California and the increasing number of homeowners in financial distress who want to avoid foreclosure and find short sales to be a dignified option?

Senate Bill 931 was filed with the Secretary of State and approved by Governor Schwarzenegger on September 30, 2010.  This new law became effective January 1, 2011.

Governor Approves SB 931

Senate Bill 931 adds a new provision to California’s Anti Deficiency Statutes, Code of Civil Procedure Section 580e.  Section 580e provides that a lender who holds a first deed of trust on residential property and agrees to a short sale is not allowed to seek a deficiency judgment or otherwise attempt to collect the balance of the loan after agreeing to approve a San Jose short sale.

This is an important piece of legislation even though it did not receive much fanfare. Many lenders that previously agreed to short sales would “reserve their rights” as to any deficiency, as a condition of the short sale approval. Reserving the right leaves the question of whether or not a lender, after a short sale closes, could seek to recover the balance of the loan after they had agreed to accept less in the short sale.

The provision of the code does not limit the ability of the first deed of trust or first mortgage to seek damages if the Trustor commits fraud with respect to the sale or waste with respect to the real property.

The section does not apply if the Trustor is a corporation or political subdivision of the state.

There is no mention as to if Section 580e of the Code of Civil Procedure is retroactive, or not. Short sale agents and/or negotiators best practice would be to ensure language to the effect that the lender is forgiving the balance is included on short sale approval letters scheduled to close before the end of 2010.