Short Sales and Deficiency Judgments

What is a deficiency judgment? Short sale sellers are often concerned about something called a deficiency judgment with respect to their short sale or foreclosure. But, what is it? A deficiency judgment is a judgment for an amount not covered by the value of security put up for a loan or installment payments. Sellers often are concerned that the bank or their mortgage holder will ‘go after them’ for the difference between the amount owed on the note and the sales price.

In California, the tables have officially turned effective immediately. Our former Governor, Arnold Schwarzenegger, signed Senate Bill 931 into law. In Senate Bill 931, any mortgage lender who holds a first trust deed cannot obtain a deficiency judgment against the seller after a short sale.

If the first lien holder provides written consent to a short sale, this will obligate the first trust deed lender to accept the sales proceeds as full payment and discharge of the remaining amount owed on the loan. This law applies to first trust deeds secured by one-to-four residential units, but does not limit the lender from seeking damages for fraud or waste by the borrower.

If you are taking a listing on a short sale outside of California, have your seller consult with a local attorney to learn more about deficiency judgments and short sale regulations in our state. And, if you are taking a listing on a short sale in California, your seller will want to learn more about whether Senate Bill 931 applies to their particular short sale situation.

Although it’s great to have a lot of listings in the pipe, it’s also great to encourage all prospective short sale sellers to do their due diligence early in the process (maybe even before taking this listing). It’s best if the seller understands all of the implications of the short sale before moving forward with the short sale transaction.

(Just a reminder that I am not an attorney nor do I play one on tv, so anyone facing the situation that I describe should really seek the advice of an attorney.)

Photo: flickr creative commons by steakpinball