San Jose Short Sale Agent: Silicon Valley Foreclosure Prevention Specialists

It is this San Jose Short Sale Agent’s opinion that  HAFA and the new California anti deficiency law make the time ideal now for homeowners who cannot make their mortgage payments solve their problem without having to worry about extended obligations to the lenders after the sale.  If a homeowner has made the difficult decision that letting go of the home is the best solution available for their current situation, here are the top 3 reasons or benefits* available to them.

1.  HAFA allows the proceeds of the sale to be used to pay off all of the parties including commissions to the realtors and a $3000 relocation fee to the homeowners and possibly $6000 to pay off a second mortgage.  So there is potentially no out of pocket costs to the homeowner to market and sell the home.   A big burden off the minds of those who are not familiar with the process.

2.  One of the tactics the second lien holders tried to use to extract extra money from the homeowners was approving the short sale but refusing to release the homeowner of the deficiency obligation.   Unless you had an astute Realtor who was aware of this trick and refused to go forth without first obtaining a waiver of the deficiency, homeowners were often stuck owing money to the lenders after they sold off the house.   NO MORE.  The new law says once you permit a short sale approval, the lenders cannot try to retain their deficiency claims.

3.  Finally, until the end of 2012, Mortgage Debt Relief Act,  relieves the homeowners of the capital gains tax obligations of their mortgage debt being forgiven.  Homeowners were often blind-sided by the notion of the forgiven debt being considered capital gains and having to pay taxes on it.   Well, until the end of 2012, this potentially huge tax obligation is waived.   This could be tens of thousands of dollars.  This is huge.

For those who have made up their mind that they need to get out from under their mortgage obligations, the situation is now ideal.  All of the potential hurdles that lay in front of them have now been pushed down.  The only thing that may be problematic is if the homeowner is in a state of shock or denial and unable to take action, and forcing the lenders to take action for them.
These are general overviews, for specific details, please contact us.

Please always deal with people who have actual experience and have data to prove they have successfully completed and closed multiple short sales.  Do your own research, be a smart consumer.  There is much at risk if a short sale goes awry.

*These are my opinions.  I am not an attorney or a tax professional, so please confirm with them first before making your decision.

Woo Hoo!  SB 458 is now the law in California!  This means the second mortgage holder must relieve a homeowner of any deficiency claim if they approve a short sale.  SB 931 made the same type of deficiency waiver mandatory for first mortgage holders, but the second mortgages were exempt.  This led the seconds to put a stranglehold on many homeowners, making unreasonable demands on distressed homeowners. NO MORE.  Short Sales mean paid in full.

As a San Jose Short Sale Agent, I believe this announcement is one of the most significant in the Short Sale process because it permits homeowners to simply walk away after the sale.  I spent many many hours negotiating with seconds to permit the homeowners to walk away without paying anything or paying as little as possible. The passage of this new law eliminates that whole unpleasant process.

Kudos to Governor Brown for having the compassion to help distressed homeowners.  Finally, some protection for the homeowners and not  just for the large banks.  We must allow short sales to process quicker and more efficiently, rather than drag on because of the seconds want to squeeze more blood out of homeowners who already suffered from negative equity and are losing their homes.  This new law makes it easier California homeowners to do a short sale now and avoid foreclosure because that little sticky issue with the deficiency claim is preserved after a foreclosure sale.   Now the reason for doing a short sale over a foreclosure becomes infinitely more clear.

CALIFORNIA ASSOCIATION OF REALTORS® applauds Gov. Brown on signing SB 458 into law

LOS ANGELES (July 15) – The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds Gov. Jerry Brown on signing SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.

Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.

“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

SB 458 contains an urgency clause making it effective upon signing.

Beginning on January 1, 2011, in California, if you were approved for a short sale, the first lien holder must automatically waive its deficiency claim that most likely would have resulted from the sale of the property for less than what was owed on the original loan.  This is thanks to the passage of Senate Bill 931 (SB 931) which was passed in September of 2010.

Prior to the passage of the aforementioned bill, most experienced agents handling short sales, spent all their energy trying to accomplish two very important goals: 1)  to get the lenders to release the note with a short pay off of the “mortgage” or sell the house for less than what is owed; and 2)  and more importantly, to get the lenders to waive any resulting deficiency claim arising from the short payoff  of said note.

Most sellers, and even some realtors, did not understand the significance of getting the second component waived in writing and had ridiculous situations where the sellers were approved for and completed the short sale, but ended up still owing the lenders the full amount of the deficiency after having sold the house.  Essentially, they would have sold the house and gained absolutely no benefit.

Imagine this scenario.   The sellers borrowed $500,000 to buy the house.  They were approved to complete a short sale for $300,000, but because the deficiency claim wasn’t negotiated away, the sellers end up still owing the lenders $200,000 (the amount of the short payoff) for their deficiency claim.   Imagine the surprise the sellers faced when the lenders contacted them demanding payments of $200,000 they lost on the transaction.   Trust me, this happened more often than people would like to believe.

Now all we have to do now is negotiate away the deficiency claims for second lenders.

As I am not permitted to give any legal advice, I wanted to share a thorough article written by a brilliant lawyer and a blogger by the name of Ron Ballard, who writes a blog called  California Short Sale Lawyer.  He goes into detail about SB 931, its origin and impact.  It was quite fascinating reading and I wanted to share it.

California Short Sale Anti-deficiency Law – Will Other States Follow

Posted by Ron Ballard

What starts in California often spreads east across the country. Will that be the case for California’s new short sale anti-deficiency law?

On August 19, 2010, the California Legislature approved Senate Bill 931 (SB 931) which added Section 580e to the Code of Civil Procedure (CCP §580e). It expands existing anti-deficiency laws regarding loans secured by dwellings of one to four units to short sales, but only to the first lien holder. It was not passed as “urgency legislation” or with a delayed effectiveness, so it will take effect on January 1, 2011.

In part, the new law provides that: “No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage.”

Existing Law

This complements two other anti-deficiency or nonrecourse provisions of CCP §580.

Under CCP §580b, California law provides that “no deficiency judgment shall lie in any event” after a sale of dwelling for not more than four families in connection with a loan “which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.” Californians loosely refer to this as saying that a purchase money loan for a personal residence is nonrecourse. It applies to purchase money junior liens as well.

Under CCP §580d, California law provides that “no judgment shall be rendered for any deficiency” upon a note secured by real property “in any case” in which the property has been sold “under power of sale contained in the mortgage or deed of trust.” This generally is referred to as California’s anti-deficiency statute. Notice that it is not limited to dwelling units for not more than four families. This applies to all private, non-judicial foreclosures. It is rare to see a judicial foreclosure in California for residential property. Judicial foreclosures are used almost exclusively for commercial properties.

New Law

The new law follows the verbiage of §580d that “no judgment shall be rendered for any deficiency.” The full verbiage of the new law is provided at the end of this article. It contains several important limitations:

1.  It applies only to the first mortgage or deed of trust.

2.  It applies only to dwellings up to four units, but does not need to be owner-occupied nor purchase money.

3.  It does NOT apply “if the trustor or mortgagor” commits either fraud with respect to the sale of, or waste with respect to, the real property. In these cases, “the holder of the deed of trust or mortgage” may still “seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.”

4.  It also does not apply “if the trustor or mortgagor is a corporation or political subdivision of the state.” (I will only discuss private borrowers.)

Practical Effects

The most important difference in the new law is that it expands anti-deficiency law from purchase money loans to short sales involving all first trust deed loans. Previously, a homeowner with a cash-out refinance would be subject to potential deficiency liability on a short sale unless the short sale processor was effective enough to obtain a statement in the short payoff approval letter that the payoff constitutes a full discharge of the indebtedness.

The Obama Administration’s “Home Affordable Foreclosure Alternatives” (HAFA) program has a similar provision. However, HAFA comes with many other unattractive and undesirable features. This author’s brief review of articles by real estate agents and brokers indicate that HAFA has not caught on to any great degree. Hence, California’s new law provides a key benefit without the drawbacks of HAFA.

A short term effect may be that homeowners try to delay short sales until 2011. Alternately, short sale processors can use the law to argue for release of liability before 2011 when a foreclosure sale cannot occur in 2010 because it has not been commenced or proceeded far enough.

The law has no effect on a cash-out second loans or HELOC’s. (Some HELOC loans were creatively used as purchase money. Although they typically state they are recourse loans, it is this author’s opinion that they fall within the nonrecourse provisions of CCP §580b because they were used “in fact” for the purchase of the property.)

The law does not apply when there was fraud “with respect to the sale.” The most common cases likely occur when the borrower claims a false hardship or otherwise lies about their financial conditions. This is sometimes referred to improperly as a “strategic default.” A strategic default, or more accurately an intentional default, is done with disclosure that it is a financial decision to breach the loan terms, not as a result of hardship. When a hardship is misrepresented to the lender and the lender justifiably relies upon that misrepresentation, then fraud ordinarily occurred.

The new law also does not apply when the trustor commits waste with respect to the property. Too often short sale properties are “trashed.” The owners neglect maintenance and might remove appliances, etc., or even commit intentional damage. In those cases, the “holder” of the deed of trust can “seek damages.” However, that appears to be limited to damages for waste because it doesn’t say that the deficiency risk remains in effect.

For the full article, click here.

Rather than write my own post about this historic event, the passage of SB 931 - especially after the Governor vetoed SB 1178, another important component of the Anti-Deficiency Protection,  I thought it would be a better idea to simply re-post this fantastic article by the fabulous blogger Elizabeth Weintraub in Sacramento.  Now all we have to do is negotiate away the deficiency on the second trust deeds (mortgages) which can be a bit more challenging.

Here is her well written post about the passage of SB 931.

If a seller in Sacramento, — or anywhere in California for that matter — ever needed a good reason to do a short sale over a foreclosure, the fact that SB 931 was signed into law by Governor Schwarzenegger on Sept. 30th should be reason enough. First lenders can no longer go after a short sale seller of one to four units. Of course, the protection against a deficiency judgment is only for a first trust deed, but it no longer matters whether that first loan was purchase money (non-recourse) or hard money(recourse). It does not apply to subsequent or junior encumbrances.

The provisions of SB 931, which is now added as Section 580e to California Civil Code, prohibits a first lender from pursuing a seller after a short sale. It does not protect those who go through foreclosure. Although purchase money loans are non-recourse, some lawyers have argued that doing a short sale gives a bank certain rights to pursue a seller after a short sale, regardless.

I have received short sale approval letters that address this right and letters that do not. Sellers are not automatically exempt from a deficiency simply because the short sale letter does not address the issue.  SB 931 clears up that confusion.

However, here is the kicker. It applies only to short sales that close on or after January 1, 2011. This could possibly mean that many sellers with only one loan may elect to postpone closing their short sale until January. Of course, sellers  facing an auction really don’t have that luxury. They may have to close or go to foreclosure.

The new anti-deficiency law applies only to one to four units, and the sellers must not have committed fraud or be a corporation or political subdivision of the state.

See previous post about SB 931.

The Governor this week vetoed SB 1178  (anti-deficiency legislation) which passed both the State Assembly and Senate and only required his signature to become law.   This was an important bill which would have brought back the legal protection to homeowners who often did not know they were losing their legal protection when refinancing their mortgages to obtain lower interest rates.

Simply put, when you borrow money to buy your primary residence in California, the nature or the purpose of that money is called “purchase money.”   Purchase money is protected and if, unfortunately, the house goes into foreclosure, the lenders cannot come after the borrower beyond the collateral or the house itself.   This is with all mortgages, you don’t have to purchase this anti-deficiency protection, it is automatic.    And most borrowers understand this to protection to a certain degree.

What most people do not understand is the moment they refinance their loans to take advantage of lower interest rates, that anti-deficiency protection is waived.   Remember, you are not doing a cash-out refinance (this legislation does not protect cash-outs), you are simply re-financing the existing loan to pay off the home, except at a lower rate.  So if the purpose or the nature of the money remains the same: for the purchase of the home, then why should the legal protection against deficiency change?

What does this have to do with interfering with existing contractual relationship as Governor Schwartzenegger claimed?

In these times where lenders are voluntarily freezing their foreclosure efforts due to improper verification of facts and where State Attorney Generals are stepping up their investigation of these matters, Governor Schwartzenegger should be looking out for California homeowners like the Senate and the Assembly, not siding with multi-national lenders.

He certainly played the role of Terminator this week.

This important legislation (SB 1178) passed the California State Assembly and is now heading to Gov. Schwarzenegger’s desk for his signature before it becomes law.   This particular legislation is immensely important during these economically difficult times where homeowners are often facing foreclosure.

This legislation attempts to protect homeowners who, in an effort to obtain lower interest rates through re-financing their loans, lost an important legal protection that limited the lenders to no more than the collateralized property during the foreclosure process. The loss of this protection essentially gave the lending institutions a second bite at the homeowners; not only were they able to take their homes through foreclosure, but they reserved their right to come after the homeowners for the full deficiency value between what was borrowed and what the property eventually sold  for.   The fact that the lenders would not take into consideration the depreciated market value of the property was an additional slap on the face to the distressed and now homeless borrowers.

As a matter of clarification, it is important to point out that this legislation protects the status of those who re-financed their purchase money loan to obtain lower rates.  It DOES NOT protect those homeowners who obtain cash-out loans and do other things like pay down credit cards or start businesses; activities unrelated to the purchase or maintenance of their homes.

As a San Jose Short Sale Agent, I see this heart-breaking scenario more than I care to mention.  Homeowners who simply wanted to lower their interest rates find out during the foreclosure process that they had given up this incredibly important anti-deficiency protection; a protection they certainly would not have given up had they been made aware that a re-finance would trigger said loss.   This is one of those legislations that is the right thing to do.

I had written a little while back about Senate Bill 1178 to extend the anti-deficiency protection to those homeowners who sought to lower their interest rates by re-financing.  Unbeknownst to them, that simple act of wanting to lower their monthly mortgage payments stripped homeowners of an important legal protection.   CAR (California Association of Realtors) sponsored the bill and issued a consumer alert and prompted consumers to contact their local representatives to voice their opinion.

It seems consumers heard and contacted their local politicians.   Now it needs to pass the State Assembly.   This bill would truly address an inequity which needed to be addressed. People should not lose their homes and still be indebted to banks just because of their desire to lower their monthly payments by re-financing their mortgages.

C.A.R. issues consumer alert on refinanced mortgages
C.A.R. issued a consumer alert yesterday warning borrowers of the liability associated with refinanced mortgages.  To help protect consumers, C.A.R. is sponsoring Senate Bill 1178 by State Sen. Ellen Corbett (D-San Leandro) to extend anti-deficiency protections to homeowners who have refinanced “purchase money” loans and now are facing foreclosure. The Senate may vote on the bill as early as next week.

Currently, if a homeowner defaults on a mortgage used to purchase their home, the homeowner’s liability on the mortgage is limited to the property itself.  While this law has helped protect borrowers since its inception in the 1930s, it does not extend the protection for purchase money mortgages to loans that refinance the original purchase debt—even in cases where the loan was refinanced to achieve a lower interest rate.

The above is an alert issued by C.A.R.  (California Association of Realtors)

Most of the clients who come to me to discuss short sales  do a lot of research online and come with the knowledge that California is a Non-Recourse State.  This means the lenders cannot come after the homeowners beyond the property itself (for any deficiency)  if the original intent  the mortgage was to purchase the property, as mentioned above.

What most borrowers  do not realize is that the moment they re-finance to take advantage of lower interest rates, the intent of the money changes to their detriment. Whether the borrower took advantage of a lower interest rate, or cashed out to pay down credit card bills, or to use as down payment on a second property, or to start a business, the nature of the money changes and the protection disappears.   Most loan brokers who were pushing re-finances during the past few years did not inform their clients of the elimination of  this important legal protection.  To be fair, most loan brokers or real estates agents probably were not even aware of such consequences.   But the fact remains,  that for many borrowers, if they were aware of such protection disappearing, perhaps they would not have been so quick to refinance.

SB 1178 is designed to extend that protection once again.   This truly is something that all of us consumers must rally behind, it is simply the right thing to do.   A homeowner should not lose this important legal protection because they want the opportunity at qualifying for lower monthly payments when times are tough.   But guess who is fighting against this measure: the Banks and their lobbyists.

Contact your local State Senator and make sure your voice is heard.   Take back your legal protection.