New Anti-Deficiency Protection for Short Sales in California

More homeowners are considering "short selling" their home in these hard economic times as an alternative to foreclosure. A "short sale" is where a home is sold for less than the homeowner owes to his or her lender or mortgage holder.

However, the mortgage holder/lender who received less than the full amount of the debt owed to it could still pursue the homeowner for the difference remaining on the indebtedness after the short sale. To address this, Governor Schwarzenegger signed Senate Bill no. 931 to provide anti-deficiency protection for borrowers. This protection applies to pre-existing, previously negotiated mortgage loan contracts subject to actions filed on or after June 1, 2011.

SB931 adds section 580e to California's Code of Civil Procedure. Pursuant to this new section: if the mortgage holder gives its written consent for the "short sale" then the mortgage holder must accept the proceeds of that sale as full payment and discharge any remaining claims it may have against its borrower for the remaining amount of indebtedness.

Homeowners should take care to note that section 580e is written with specific reference to a: "note secured by a first deed of trust or first mortgage." SB931 [setting forth the language of C.C.P. section 580e.]. Therefore, homeowners that have a second mortgage or HELOC, may not be able to completely rely on this new law to protect themselves from liability for amounts owed under other notes that are secured by their homes. Also, as indicated above, an anti-deficiency action filed before June 1, 2011, may not be precluded by this new law.

Before taking any action in reliance on this new law, homeowners should take care to consult with an attorney or perform their own legal research. California's leginfo.ca.gov is one helpful website to start with.