This article is not intended to be a substitute for legal advice from your attorney. In fact CENTURY 21 Alpha strongly recommend that you obtain legal and tax advise prior to entering into a short sale transaction. We will be glad to attend a meeting with you and your attorney and tax advisor.
(This article applies to Short Sales ONLY)
A short sale is the sale of real property where the seller’s mortgage lender agrees to accept a loan payoff for less than what is owed as an outstanding balance. In a short sale, a seller is “upside down,” which means the amount owed to the mortgage lender is more than the market value of the property. If the seller cannot or does not want to pay that difference out-of-pocket, the seller can request that the lender accepts a loan payoff for less than what is owed in exchange for releasing the lender’s security interest on the property. Each lender has its own guidelines and procedures for considering short sale requests.
When more is owed on a mortgage loan than the sales price, the deficiency is the difference between the outstanding loan balance and the loan payoff received by the lender. A deficiency may arise in connection with a short sale or foreclosure.
The new law generally prohibits a mortgage lender from collecting a deficiency or obtaining a deficiency judgment for a short sale involving a loan secured by a one-to-four residential unit property. The new law also generally prohibits a lender from requiring the borrower (property owner) to pay any additional compensation, aside from the proceeds of the sale, in exchange for a short sale approval. This law applies to first trust deeds, second trust deeds, and other junior trust deeds.
This law came into effect on July 15, 2011 when it was filed as an urgency statute with the California Secretary of State.
This law is set forth as section 580e of the California Code of Civil Procedure (CCP). Before it became law, the legislation was referred to as Senate Bill 458 (Corbett) or SB 458 of the 2011-2012 legislative session. The full text of the law is available at www.leginfo.ca.gov.
According to the California legislature, the purpose of the new law as an urgency statute is to mitigate the impact of the ongoing foreclosure crisis and to encourage the approval of short sales as an alternative to foreclosure.
Prohibiting a lender from pursuing a deficiency may, at least in theory, discourage certain lenders from approving a short sale, especially if the loan is a recourse loan or the amount of the deficiency is very large. Yet, even without the new law, a lender may not have approved those types of short sales anyway. Furthermore, a lender considering a short sale request looks at many different factors other than a borrower ’s (property owner’s) personal liability. Also, the previous law prohibiting short sale deficiencies for first trust deeds that was in effect from January 1, 2011 to July 15, 2011 did not seem to have a chilling effect on the short sale practice.
On the flip side, the new law brings much needed clarity to short sale transactions for sellers. The new law should encourage sellers, who may have otherwise been on the fence, to do short sales now that they have an assurance that, if the new law applies to their situation, they will not be held personally liable for any short sale deficiency.
To fall within the protection against personal liability for a short sale deficiency, a borrower (property owner) must satisfy all of the following requirements, and not fall within any of the exceptions listed below.
· Mortgage loan is solely secured by a deed of trust or mortgage;
· Mortgage loan is for a dwelling of not more than four units;
· Borrower (property owner) sells the property for less than the outstanding loan balance;
· Lender provides written consent for the short sale;
· Title voluntarily transfers to a buyer by grant deed or other document of conveyance recorded in the county where the property is located; and
· Proceeds of the sale have been tendered to the lender or lender’s agent in accordance with the parties’ agreement.
· Fraud
· Waste to the real property
· Cross-collateralized loans
· Borrower (property owner) (property owner) is a corporation, limited liability company, or limited partnership (CCP § 580e (d) (1));
· Borrower (property owner) (property owner) is a political subdivision of the state (e.g. a state government entity) (CCP § 580e (d) (1));
· Deed of trust, mortgage, or other lien securing the payment of a bond or other evidence of indebtedness authorized by the Commissioner of Corporations (CCP § 580e (d) (2)); and
· Deed of trust, mortgage, or other lien made by a public utility subject to the Public Utilities Act (CCP § 580e(d)(2)).
The anti-deficiency protection under CCP § 580e applies only to properties with one-to-four residential units. It does not specifically apply to properties with five or more residential units, commercial properties, or vacant land.
The anti-deficiency protection for short sales applies to purchase money loans, refinance loans, and home equity credit lines secured by one-to-four residential unit properties. For such refinances, the anti-deficiency protection for short sales applies to all types of refinance loans, regardless of whether the borrower (property owner) refinanced to obtain a lower interest rate only or took cash out to make home improvements, to pay off credit cards, or for any other purpose.
The anti-deficiency protection is for short sales involving owner occupied or non-owner occupied properties. Non-owner occupied properties include rental properties, vacant homes, second homes, or vacation homes. Of course, a lender may elect not to approve a short sale for a non-owner occupied property, but if the lender agrees to the short sale and the other requirements are met, the borrower (property owner) will not be personally liable for any short sale deficiency.
The anti-deficiency protection for short sales only applies to notes secured by deeds of trust or mortgages for one-to-four residential unit properties. It does not apply to other types of security interests in real property, such as, but not limited to, judgment liens, homeowners’ associations (HOA) liens, tax liens, child support liens, mechanics’ liens, attachment liens, or execution liens.
A short sale transaction should be consummated or close escrow after this law came into effect on July 15, 2011 for the seller to be protected under the new law. See CCP § 580e (a) (1) (prohibiting a deficiency or deficiency judgment in any case in which the borrower (property owner) “sells the dwelling”). Other time frames during the short sale transaction, such as when the seller entered into a purchase agreement or when the lender approved the short sale, do not appear to be relevant for determining whether the new law applies.
A short sale deficiency law specifically protects a borrower (property owner) in a short sale involving a one-to-four residential unit property from all of the following:
· Owing a deficiency;
· Having a lender collect a deficiency;
· Having a lender request a deficiency judgment;
· Having a court render a deficiency judgment;
· Being required to pay any additional compensation, aside from the proceeds of the sale, to obtain short sale approval and
· Any purported waiver of the borrower (property owner) (property owner)'s rights.
The new law does not require any lender to approve a short sale or to accept a loan payoff for less than the balance owed. Instead, for applicable transactions, the law prohibits a lender that has approved a short sale and has been tendered the proceeds of the sale from pursuing a deficiency or deficiency judgment, and further prohibits a lender from requiring a borrower (property owner) to pay any additional compensation, other than the proceeds of the sale, in exchange for a short sale approval.
This law does not require any lender to approve a short sale. Instead, for applicable transactions, the law prohibits a lender – whether that lender is the holder of a first trust deed, second trust deed, or third trust deed – that has approved a short sale and has been tendered the proceeds of the sale from pursuing a deficiency or deficiency judgment. It also prohibits a lender from requiring a borrower (property owner) to pay any additional compensation, other than the proceeds of the sale, in exchange for a short sale approval.
Any purported waiver of the anti-deficiency protection for short sales is void and against public policy (CCP § 580e (e)). I
The law prohibits a lender from requiring the borrower (property owner) to pay any additional compensation to obtain a short sale approval, other than the proceeds from the sale (CCP § 580e (b)). The law, however, does not prohibit a lender from rejecting a short sale request altogether.
Because a lender can reject a short sale altogether, this law is unlikely to prohibit a lender from approving a short sale for a sales price higher than what was submitted, as long as the lender seeks no additional monetary compensation from the borrower (property owner).
The law does not prohibit a seller from volunteering to pay a monetary contribution to help ensure that a lender will approve a short sale.
The difference between a lender requiring a monetary contribution, which is prohibited, and a borrower (property owner) volunteering to pay a monetary contribution, which is permissible, depends on the facts and circumstances of each particular transaction, including the chain of events and negotiations between the short sale lender and borrower (property owner). However, whether a monetary contribution violates the anti-deficiency law for short sales is, generally speaking, a concern for the short sale lender, not seller.
As you can see this is a complicated issue and the facts of each short sale may be different. Again, CENTURY 21 Alpha strongly recommend that you obtain legal and tax advise prior to entering into a short sale transaction. We will be glad to attend a meeting with you and your attorney and tax advisor.
No comments:
Post a Comment