I’ve had three calls this week about short sales and the burning question has been, "Can the lender come after the borrower for the difference?"
If the loan (Deed of Trust) is a purchase money loan secured by a house that is the borrower’s principal residence, the answer is generally, "No." California’s anti-deficiency laws (California Code of Civil Procedure Section 580(b)-(d) protect homeowners by preventing lenders from doing any more than taking back the property. These anti-deficiency laws were enacted in Dustbowl era to give homeowners a fresh start, without a deficiency judgment hanging over their heads.
However, the code section is fairly specific. The loan had to be for the purchase of the property. The borrower has to occupy it as his or her principal residence.
Vacation home? No luck.
Investment home? No luck.
In both those circumstances, the lender can choose to file a judicial foreclosure (I am doing more of these this year than in years previous) against the borrower.
Here is the more tricky part – refinance loans or home equity lines of credit. Technically those are not purchase money loans so in theory, a lender could go after the borrower for the difference. However, I suspect that in response to the present fears about the volatile sub-prime lending market, legislators will be amending California’s anti-deficiency statutes to include refinance loans. That’s my prediction for 2008-2009. You read it here first at the Dirtlaw Blog TM!