A new law went into effect on July 15, 2011 in California that made it easier for the homeowner to get complete debt relief after a short sale.
Before SB 458 was passed, lenders often had the ability to pursue the borrower personally for the difference between the amount owed and the amount collected through the short sale. This difference is called a 'deficiency'.
Here's an example of a bank going after the deficiency. A reader writes:
In January 2010 we completed a short sale in Upland, Californa where there was a Bank of America first trust deed of $440,000 and a Chase second trust deed of $155,000. We found a buyer willing to purchase the property for $350,000. Bank of America agreed to accept a short pay off and gave Chase $3,000 to allow the sale to proceed. Seven months later we received a call from a debt collector representing Chase, that demanded $65,000 to settle the second. We thought the short sale would leave us free from mortgage debt but we were wrong. Our agent didn't understand that the short sale approval we received from Chase did not protect us from personal liability.
There are many examples where the sellers entered into short sale agreements with their banks that did not guaranteed them debt relief after the sale.
Since the passage of this bill, however, lenders in first position, and in many instances those in junior positions, are restricted from collecting any deficiency after a short sale they agreed to in writing.
There are exceptions. For instance the law applies to residences between one to four units, it does not apply to borrowers who are corporations or a political subdivision of the state nor to borrowers who committed fraud with respect to the sale or who severely damaged the property.
Homeowners are urged to consult with their legal and tax experts for details.
