New California Law To Prohibit Consenting Junior Lienholders From Scoring Deficiency Judgments On Short Sales

American Banker reports:

• The California Association of Realtors declared victory in getting a bill signed into law that prohibits junior lien holders from pursuing a deficiency judgment on short sales. For some homeowners the prospect of a deficiency judgment hanging over their heads was a deterrent to giving up their homes through a short sale or strategic default.



• Gov. Jerry Brown signed the bill, sponsored by state Senate Majority Leader Ellen Corbett, D-San Leandro, into law last week. The law limits any lien holder from going after borrowers if the sale of a home does not satisfy the entire mortgage balance.(1)

For more, see Short Sale Deterrent Eliminated By New California Law.

(1) See Lexology: California legislature fixes “short sale” law, which points out that only junior lienholders who consent to the short sale will be precluded from suing for any deficiency (requires subscription; if no subscription, TRY HERE):

• [T]he holder of a second priority deed of trust (such as a lender who has obtained a second deed of trust to secure a home equity line of credit (“HELOC”)) who consents to a short sale of the dwelling is also precluded from obtaining a personal judgment against the borrower.
  
  This change was intended to benefit borrowers but may have the opposite effect in some circumstances. Under existing law, a foreclosure under the senior deed of trust terminates the junior deed of trust and, in most circumstances, entitles the holder of the junior deed of trust to proceed against the borrower for a personal judgment.
  
  Under SB 458, the holder of the second deed of trust may conclude that it is preferable to refuse to consent to a short sale, allow the holder of the first deed of trust to foreclose, and then sue the borrower for the amount owed on the note secured by the second deed of trust.