Junior lenders who consent to a short sale of underwater homes are barred from seeking to collect anything further from sellers under a newly enacted California statute.
The law, signed on July 15, 2011, becomes effective immediately. It applies to properties, held by individuals, comprising 1-4 residential units. Senate Bill 458 accords the same restrictions on seeking a deficiency judgment as SB 931 mandated for the senior lender.
Before these two bills were enacted, a secured lender who agreed to a short sale might reserve the right to collect the shortfall from the seller. Too often, the selling homeowner was not aware until very late in the transaction whether he would emerge free of the debt or still owing the lender.
Now, for transactions covered by this legislation, consent to the short sale is a waiver of future action against the borrower.
Hurray!
Does this apply to both equity lines as well as seconds used to purchase the property?
A junior lien used to purchase a home in California would have no right to pursue the seller in any event. I read this to apply to any consensual loan secured by a property with 1-4 units, including home equity lines.
Truly good news!
Cathy, how does this affect the ability of the junior lender to issue a 1099 for cancellation of debt?
Seems to me the law guarantees that there is cancelled debt. Whether it triggers taxable income depends on whether the debt was non recourse or whether the debtor was insolvent at the time. Either are a safe haven against taxable income.
We are selling our home short sale alot of things happened so have to let the house go. We also have a second what can happen to us Im hearing alot of different thing Im really worried
The gist of the new state law is that any junior lien holder who consents to a short sale gives up the right to collect the money owed on the debt. It does trigger the possibility of cancellation of debt income. Cathy