California Gov. Jerry Brown signed a new law July 15 that prevents first and junior mortgage lien holders from pursuing short-sale sellers for money they owe after a short sale.
A short sale is a transaction in which the mortgage lender agrees to accept a price that’s less than the amount owed on the property. The lender typically forgives the rest of the loan and a buyer purchases the property at a discount. With the recent economic downturn, lenders would reserve the right to pursue the seller for any shortfall, or would be silent on the matter, leaving the seller potentially exposed to such a claim.
Another law passed last year required primary mortgage lenders to accept the agreed short-sale payment as full payment for the loan, but it did not apply to second-lien holders. The new law extends the requirement to secondary or junior lenders and ensures that once a lender agrees to accept a short-sale payment on a residential property – one to four units – all lien holders must consider the outstanding balance as paid in full.
The new measure, which went into effect immediately, is designed to help distressed homeowners.
“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes and demand an additional payment to subsidize the difference,” said Beth L. Peerce, president of the California Association of Realtors.
The new law also prohibits a lender from requiring any additional compensation other than the proceeds of the sale in exchange for the lender’s approval. Exceptions to the new rule include a borrower that is a corporation, a limited partnership and a lender seeking damages as a result of fraud or waste committed by the borrower.
While the new law broadens protection for sellers, Silicon Valley Association of Realtors President Gene Lentz advised short-sale sellers to consult with appropriate professionals about the process.
“The new law provides added protection for short-sale sellers, but it is always best to consult a knowledgeable real-estate attorney and tax adviser to help you consider what might be the best option for you,” he said.
The Silicon Valley Association of Realtors provided information for this article.