New Law Regarding Short Sales Goes Into Immediate Effect: No Deficiency Judgments


On July 11, 2011, Governor Brown signed into law SB 458, a new bill that extends the reach of California’s anti-deficiency law so that a lender can no longer pursue a residential borrower for a deficiency when the lender agrees to a short sale. Because SB 458 was an “urgency bill,” it became effective almost immediately, on July 15, 2011.

On September 30, 2010, then-Governor Schwarzenegger signed into law SB 931 that for the first time prohibited lenders in California from pursuing borrowers for deficiencies on first mortgages if the collateral consisted of residential property of four units or less and the property was sold through a short sale. A “short sale” is a tripartite (three part) agreement between a seller, buyer and mortgage lender, whereby the property is sold at a price that is less than the amount of the secured debt. The lender agrees to accept a discounted payoff to remove the mortgage from the property. The “deficiency” is the difference between the amount of the debt and what the bank collects from the proceeds of the sale.

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