| If Governor Schwarzenegger signs SB 931 before | | | | specified. Existing law prohibits a deficiency |
| September 30, 2010, it will add section 580e to | | | | judgment in any case in which the real property |
| the Code of Civil Procedure which will prohibit first | | | | or an estate for years therein has been sold by |
| mortgage holders from seeking a deficiency | | | | the mortgagee or trustee under power of sale |
| judgment in any transaction where they have | | | | contained in the mortgage or deed of trust. |
| provided written consent to a short sale. This | | | | This bill would prohibit a deficiency judgment under |
| would add significant protections to California's | | | | a note secured by a first deed of trust or first |
| current anti-deficiency laws (e.g. CCP 726, 580d | | | | mortgage for a dwelling of not more than 4 units |
| and 580b) when dealing with short sale | | | | in any case in which the trustor or mortgagor |
| transactions. | | | | sells the dwelling for less than the remaining |
| This new law would provide far more relevant | | | | amount of the indebtedness due at the time of |
| protections for borrowers seeking a short sale | | | | sale with the written consent of the holder of the |
| than the protections promised by another law | | | | first deed of trust or first mortgage. The bill |
| awaiting the Governor's signature, SB 1178. As I | | | | would provide that written consent of the holder |
| stated in a prior post, SB 1178 would expand the | | | | of the first deed of trust or first mortgage to |
| purchase-money protections of CCP 580b to any | | | | that sale shall obligate that holder to accept the |
| refinancing of the original purchase-money loan but | | | | sale proceeds as full payment and to fully |
| NOT to any amount taken out in cash from such | | | | discharge the remaining amount of the |
| refinancing. Additionally, 580e would apply directly | | | | indebtedness on the first deed of trust or first |
| to short sale transactions. Therefore, the new | | | | mortgage. |
| 580e is the saving grace for those borrowers | | | | The bill would specify that those provisions would |
| seeking a short sale with a cash-out refinance | | | | not limit the ability of the holder of the first deed |
| loan. | | | | of trust or first mortgage to seek damages and |
| Although this is great news for all of us working | | | | use existing rights and remedies against the |
| to help financially troubled homeowners, don't | | | | trustor or mortgagor or any 3rd party for fraud |
| break out the Champagne glasses just yet. | | | | or waste if the trustor or mortgagor commits |
| Serious questions remain about how this new law | | | | either fraud with respect to the sale of, or waste |
| will be implemented and interpreted. For instance, | | | | with respect to, the real property that secures |
| can the borrower waive the protections afforded | | | | that deed of trust or mortgage. The bill would |
| by 580e? What happens if the lender keeps the | | | | make these provisions inapplicable if the trustor or |
| language in the approval letter reserving the right | | | | mortgagor is a corporation or political subdivision |
| to seek a deficiency? Is that considered a waiver | | | | of the state. |
| of 580e? What if the lender asks for, and the | | | | The new section 580e would read as follows: |
| borrower signs, a new promissory note? These | | | | 580e. |
| issues will not be resolved any time soon. | | | | (a) No judgment shall be rendered for any |
| Therefore, real estate agents and lawyers alike | | | | deficiency under a note secured by a first deed |
| should be very cautious in giving advice about the | | | | of trust or first mortgage for a dwelling of not |
| implication of both the new 580e and the revised | | | | more than four units, in any case in which the |
| 580b (if the bills are signed into law). What we can | | | | trustor or mortgagor sells the dwelling for less |
| do is use the new law as significant leverage | | | | than the remaining amount of the indebtedness |
| against the first lien holder to force the complete | | | | due at the time of sale with the written consent |
| REMOVAL of the deficiency language from the | | | | of the holder of the first deed of trust or first |
| approval letters. | | | | mortgage. Written consent of the holder of the |
| What the legislature has yet to address is the | | | | first deed of trust or first mortgage to that sale |
| second lien issue. These laws have no effect on | | | | shall obligate that holder to accept the sale |
| second lien holders (lenders and other creditors | | | | proceeds as full payment and to fully discharge |
| alike). As we all know, the second lien holder can | | | | the remaining amount of the indebtedness on the |
| be far more troublesome than the first... this new | | | | first deed of trust or first mortgage. |
| law will not affect them in any way. As all lenders | | | | (b) If the trustor or mortgagor commits either |
| become more and more aggressive, we will need | | | | fraud with respect to the sale of, or waste with |
| some leverage against the second lien holders. | | | | respect to, the real property that secures the |
| Until then, we will need to keep fighting back | | | | first deed of trust or first mortgage, this section |
| against their unreasonable demands. | | | | shall not limit the ability of the holder of the first |
| The LEGISLATIVE COUNSEL'S DIGEST for the | | | | deed of trust or first mortgage to seek damages |
| new law reads as follows: | | | | and use existing rights and remedies against the |
| Existing law authorizes an action for a deficiency | | | | trustor or mortgagor or any third party for fraud |
| judgment for the balance due upon an obligation | | | | or waste. |
| for the payment of which a deed of trust or | | | | (c) This section shall not apply if the trustor or |
| mortgage with power of sale upon real property | | | | mortgagor is a corporation or political subdivision |
| or any interest therein was given as security, as | | | | of the state. |