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Palo Alto real estate attorney Julia Wei providing commentary & insight into trends in California real estate law & lending law, mortgages & foreclosures.

California’s Anti-Deficiency Law – revised for Short Sales

October 22nd, 2010 · 2 Comments · California Lending & Mortgage Law, Trust Deeds

Finally, some clarity now for sellers of underwater property in California.  In the past, there had been some uncertainty whether lenders could pursue short sale sellers for a deficiency after approving a short sale. 

The reason was that the California Code of Civil Procedure Section 580d discussed what happens after a Trustee's sale (foreclosure sale), but it was not clear that a short sale was the same as the Trustee's sale (although arguably under Section 726, the "One Action Rule", approval of the short sale might be construed as an "action" on the lender's part.)

Now, Senate Bill 931 has been signed by the Governor and it is summed up as follows: "This bill requires the holder of a first mortgage or deed of trust that is secured by residential real property to accept, as full payment, the proceeds of a short sale to which it agrees in writing, and obligates that note holder to fully discharge the remaining amount of the borrower's indebtedness on the deed of trust or mortgage following the sale."

What does that mean? It means that if you are a home owner in Santa Clara county (or anywhere in California), and you owe more than the house is worth, and the lender agrees to accept less as part of a short sale--you do not owe the lender anything further.

Prior to this law, lenders had a practice of approving short sales, releasing their deeds of trust but selling their promissory notes to collection agencies.



2 Comments so far ↓

  • Donutpro

    Agghhhhh… finally. I have had two short sale transactions fall apart over fears of recourse. This is good news for Agents and Sellers. Julia, please keep up the posts.

  • Brad Yzermans

    How does a short sale impact lender’s ability to seek deficiency on a HELOC that was not used to purchase the home? It was a tool to do some debt consolidation…like a big ATM card. Will short selling homeowner be taxed by the IRS for the deficiency? Can filing a bankrutpcy discharge them of this debt? What if the short selling homeowner has no job and no assets but the spouse does….and in California. Can the lender seek judgement on the spouses assets or consider spouses income if shortselling borrwer is filing insolvency? Spouse with job and assets was never on the loans.

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