On the surface Senate Bill 458 appears to be a god send to distressed homeowners pursuing short sale, but is it?
Last Friday our fearless (though often cocksure) Governor, Jerry Brown passed legislation to expand on the protection afforded to property owners in California. This new law, SB 458, simply states that all lenders, regardless of lien position can not seek a deficiency judgment against a borrower after a short sale has closed. Where this Bill really succeeds is in its difference from its predecessor SB 931.
SB 931 was the first major step taken by California to protect distressed homeowners from the sting of a deficiency judgement being levied against them by a senior lien holder in a purchase money, primary residence property; however it still allowed junior liens to pursue this remedy. SB 458 states that deficiency judgment can not be asked for or required by any lien holder regardless of what position it is in. It also expands coverage to multi-unit residential properties.
On the surface SB 458 seems like it is the best thing since sliced bread, as it not only protects homeowners currently in the process of selling their property short, but it also acts as an incentive for homeowners that are facing foreclosure, and urges them to short sell instead of walk away. However, the law does not address the common practice of lenders seeking a contribution at closing to approve a short sale.
While we do not want to be negative and are not a dooms-day style publication, we can not help but believe that we will see an increase in these “contributions” being required before lenders will approve short sales. As we all know the banks, are not in the business of letting people off the hook (even though these same people “on the hook” bailed them out!), and it is hard to believe that there isn’t a team of overpaid lawyers sitting in a room right now trying to figure out how they are going to earn their bonuses this quarter.
Even if the lenders start requiring large contributions, short sale still remains the best option for a homeowner or investor facing foreclosure. Now that banks cannot seek deficiency as a legal remedy to short selling, the only difference between a foreclosure and a short sale is that in the latter your credit is not absolutely destroyed. In addition a good negotiator can always handle contribution issues, you just need to be sure that the agent you are working with is very experienced in dealing with lenders in this fashion.
Our prediction is that in several months we will be looking at another bill dealing with cash contributions, but if I were a distressed property owner I would not hold my breath, I would get out now and focus on getting into a different property at the current market price and rates (but remember it is going to be a very long time before you will qualify for anything if you let your property foreclose!)
John is the Vice President here at JohnHart, and as such is responsible for managing and directing the firm towards obtaining its ultimate goals.
He is also one of our main contributors on the Blog. (please see his profile page on the main site for more information.)
