This law clarifies the antideficiency protections available to one-to-four unit residential property owners following a short sale.
Code of Civil Procedure §580e
Amended by SB 458
Effective: July 15, 2011
A note secured solely by any type or priority of trust deed encumbering a one-to-four unit residential property, owner occupied or not, and sold under a lender’s short sale consent for an amount less than the debt (called a short sale) is now nonrecourse paper subject to antideficiency protection, if:
- title to the property is transferred to the buyer via a recorded grant deed or quitclaim deed; and
- the net proceeds of the sale are received by the lender in compliance with the lender’s written conditions for their short sale consent.
The same rules apply if a short sale occurs on a property for which the note is further secured by other property in addition to the one-to-four unit residential property, called cross-collaterization. In this case, the lender and all other parties with an interest in the trust deed lien on the property are barred from recovering further under the note secured by the trust deed on the one-to-four unit residential property.
A lender cannot collect any other compensation for a short sale consent beyond the net proceeds they agreed to accept and received from the short sale.
The above protections cannot be waived by the borrowers and owners of the property.
This antideficiency protection does not extend to:
- limited liability companies (LLCs);
- limited partnerships (LPs);
- political subdivisions of the state;
- trust deeds or liens securing debt issued by the Commissioner of Corporations; or
- trust deeds or liens made by a public utility.
Editor’s note — While much was made of this in real estate trade union circles, its basic effect on the market will at best be negligible. This law does not provide antideficiency protection against second trust deeds UNLESS a written short sale consent exists with that second trust deed lender. The likelihood of any second trust deed lender waiving their recourse rights by entering into a short sale consent is even more remote now that there is no way for the lender to collect on the money due after the short sale closes.
Owners will now better understand what they’re in for should the second lender refuse to cooperate. It’s more advantageous for a recourse second (not a purchase-assist note) money lender to force the first trust deed holder to foreclose and wipe out the second trust deed. They simply sue the owner/borrower directly on the note which is no longer secured. [For more information about the changes to antideficiency which took effect earlier this year, see the November 2010 first tuesday Legislative Watch.]
Also interesting to note is that the prohibition against waiver only specifically applies to the antideficiency protection for individuals with short sale consent voluntarily entered into by their mortgage lender(s). However, lenders may, at their whim, waive their right reserved to them to pursue money due from corporations, LLCs, LPs, etc., when discounting a note these entities signed.