SB 458 Fills Hole in Homeowners’ Short Sale Protection
On July 11, 2011, Governor Jerry Brown signed Senate Bill 458. Effective immediately, the new law provides critical protection to homeowners pursuing short sales of their underwater properties.
A little background: On January 1, 2011, California’s anti-deficiency laws (contained in Section 580 of the Code of Civil Procedure) were amended to include limited protection to borrowers following a short sale. Prior to that time, the only anti-deficiency protections available to borrowers occurred following a foreclosure of the loan by the senior lien holder. By adding subsection “e” to Section 580, Senate Bill 931 enacted a bar against senior lien holders pursuing collection of a loan deficiency following that lender’s consent to a short sale. Unfortunately, no similar protection was enacted for borrowers with junior liens on their properties.
The problem developed that these junior lien holders were aggressively pursuing collection of loan balances despite agreeing to short sales negotiated by the borrower and the senior lien holder. The end result was that many borrowers were opting for foreclosure in an attempt to obtain protection under the foreclosure anti-deficiency statutes. This trend compounded the foreclosure crisis and further drove down property values. For that reason, and on an expedited basis, the California Association of Realtors sponsored SB 458 specifically to bar collection by junior lien holders who consented to short sales. That is the legislation that Governor Brown signed on July 11th.
SB 458 is unusual in that it contains an “urgency provision.” In most situations, there is a lag between the time a governor signs a bill and when it becomes effective. But SB 458 (which revises the new Code of Civil Procedure Section 580e) by its terms is effective immediately, a clear recognition by the legislature and the governor of the serious nature of the problem created by the junior lien holders’ hard-nosed collection actions. SB 458 will apply to any short sale that closes escrow on or after July 11, 2011. (In other words, we look to the date escrow closes, rather than the date of the lender’s approval.)
The law also specifically makes “void and against public policy” any attempt by a junior lien holder to force a borrower to waive the protections of the new law as a condition of a short sale approval. In other words, even though a borrower may sign a waiver in a short sale approval letter, if escrow closes after July 11, 2011 the lender may not enforce the waiver.
In addition, effective immediately a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval; however, the new law does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale. A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, agents, relatives, and the like.
A significant question exists whether junior lien holders will now simply refuse to approve short sales and instead force borrowers into foreclosure, further exacerbating the housing crisis. A similar concern was raised following the enactment of SB 931; however, that concern has proved largely unfounded. In short, we will have to wait and see.
If you or a client has questions regarding the applicability of the new legislation to a particular transaction, please contact me and I will be happy to consult with you and/or the client regarding this issue.