Short sale sellers with a refinanced first mortgage should be dancing down the soul train line with this news. In California, prior to Senate Bill 931 being signed by Governor Schwarzenegger, once a seller has refinanced their mortgage, whether it is a cash out refinance or simply a refinance to a lower interest rate or term, the loan becomes a “recourse loan”, meaning the bank can pursue the seller after the short sale for the deficiency, unless they state in writing that the debt is settled on the short sale approval.
Many banks have been unrelenting in their short sale approval letter verbiage on refinances, saying they will follow state laws to pursue a deficiency judgment. California lawyers sometimes argue that even if the loan was purchase money and exempt from a deficiency, such language in the short sale approval letter allowed the bank to pursue sellers after closing a short sale because the approval letter changed the status of the loan. California short sale sellers with a first mortgage will no longer have to worry about a deficiency judgment after a short sale.
Starting January, 1, 2011 a seller’s first trust deed lender cannot obtain a deficiency judgment against the seller after a short sale. Providing written consent to a short sale shall 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 pertains to first trust deeds secured by one-to-four unit residential properties and does not have to be owner occupied. It does not apply to junior liens and does not limit the lender from seeking damages for fraud or waste by the borrower. Senate Bill 931-Deficiency Judgments-creates California Civil Code section 580(e).