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California deficiency rights

Posted by Rob Regan on June 1, 2011 at 4:10am in Short Sale Discussions

I have an approval letter with no language addressing deficiency or right to pursue or not.  This is in California - a non-deficiency state.

The only thing the letter says is "This letter will serve as acceptance of a short payoff involving the following property:....."  And it says "No additional statements will be issued."

The negotiator has said there may or may not be a 1099C sent to the borrower.

I'm of course going to tell the borrower he MUST speak to an attorney to find out whether or not he is at risk of the lender pursuing him later for a deficiency. But I'm curious what SSSS's think - since there is no language saying they do have the right to pursue - isn't that sufficient? Or not?

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  • Karen Roberts June 5, 2011 at 12:46pm

    Attached is the antideficiency ruling in CA.  The IRS 1099c is the IRS and is totally different from the Cal. Civil Code regarding antideficiency.

     

    BILL NUMBER: SB 931 CHAPTERED BILL TEXT

    CHAPTER  701
    FILED WITH SECRETARY OF STATE  SEPTEMBER 30, 2010
    APPROVED BY GOVERNOR  SEPTEMBER 30, 2010
    PASSED THE SENATE  AUGUST 19, 2010
    PASSED THE ASSEMBLY  AUGUST 16, 2010
    AMENDED IN ASSEMBLY  JUNE 1, 2010
    AMENDED IN SENATE  MARCH 25, 2010
    AMENDED IN SENATE  MARCH 15, 2010

    INTRODUCED BY   Senator Ducheny

                            FEBRUARY 2, 2010

       An act to add Section 580e to the Code of Civil Procedure,
    relating to mortgages.


    LEGISLATIVE COUNSEL'S DIGEST


       SB 931, Ducheny. Mortgages: deficiency judgments.
       Existing law authorizes an action for a deficiency judgment for
    the balance due upon an obligation for the payment of which a deed of
    trust or mortgage with power of sale upon real property or any
    interest therein was given as security, as specified. Existing law
    prohibits a deficiency judgment in any case in which the real
    property or an estate for years therein has been sold by the
    mortgagee or trustee under power of sale contained in the mortgage or
    deed of trust.
       This bill would prohibit a deficiency judgment under a note
    secured by a first deed of trust or first mortgage for a dwelling of
    not more than 4 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. The bill would
    provide that written consent of the holder of the first deed of trust
    or first mortgage to that sale shall obligate that holder to accept
    the sale proceeds as full payment and to fully discharge the
    remaining amount of the indebtedness on the first deed of trust or
    first mortgage. The bill would specify that those provisions would
    not limit the ability of the holder of the first deed of trust or
    first mortgage to seek damages and use existing rights and remedies
    against the trustor or mortgagor or any 3rd party for fraud or waste
    if the trustor or mortgagor commits either fraud with respect to the
    sale of, or waste with respect to, the real property that secures
    that deed of trust or mortgage. The bill would make these provisions
    inapplicable if the trustor or mortgagor is a corporation or
    political subdivision of the state.



    THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

      SECTION 1.  Section 580e is added to the Code of Civil Procedure,
    to read:
       580e.  (a) 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.
    Written consent of the holder of the first deed of trust or first
    mortgage to that sale shall obligate that holder to accept the sale
    proceeds as full payment and to fully discharge the remaining amount
    of the indebtedness on the first deed of trust or first mortgage.
       (b) If the trustor or mortgagor commits either fraud with respect
    to the sale of, or waste with respect to, the real property that
    secures the first deed of trust or first mortgage, this section shall
    not limit the ability of the holder of the first deed of trust or
    first mortgage to seek damages and use existing rights and remedies
    against the trustor or mortgagor or any third party for fraud or
    waste.
       (c) This section shall not apply if the trustor or mortgagor is a
    corporation or political subdivision of the state.
    580d.  No judgment shall be rendered for any deficiency upon a note
    secured by a deed of trust or mortgage upon real property or an
    estate for years therein hereafter executed in any case in which the
    real property or estate for years therein has been sold by the
    mortgagee or trustee under power of sale contained in the mortgage or
    deed of trust.
       This section does not apply to any deed of trust, mortgage or
    other lien given to secure the payment of bonds or other evidences of
    indebtedness authorized or permitted to be issued by the
    Commissioner of Corporations, or which is made by a public utility
    subject to the Public Utilities Act (Part 1 (commencing with Section
    201) of Division 1 of the Public Utilities Code).
     
  • ElizabethWeintraub00697006LyonRE June 5, 2011 at 6:15am
    Lots of people make the mistake of thinking that because there may no language addressing a release of liability that it doesn't matter. It DOES matter. Even a purchase money loan is not automatically exempt after a short sale -- that coverage extends to foreclosures, NOT short sales. Short Sales are different. Although Section 580e of the Civil Code offers protection, it hasn't yet been challenged, says some lawyers. They don't rely solely on it. If I were a seller, I would want a release of liability. Period. You have nothing to lose by asking for it. If you don't want to, have a lawyer ask for it.
  • Thom Colby CA Brkr 888-391-5245 June 5, 2011 at 5:24am

    Rob -

     

    Google SB931  In CA, if the lender approves short sale there can be no deficiency on the 1st.  The seller may get a 1099c but their tax preparer / CPA will need to handle it for them.

     

    Best of luck,


    Thom Colby

    Broker / Negotiator

    Newport Beach CA

  • Kimberley Kelly June 5, 2011 at 3:33am
    Always send them to their CPA or tax attorney of course.  However, as Tara says, The Debt Forgiveness Act should give them the protection they need...through 12/2012.  But..I do not like those vague approval letters.  I have not had a Lender yet REFUSE to put in some verbage..just make it very clear and easy for them to do it.  Those letters are not state specific and are meant to be vague..
  • Trina Gonzales June 3, 2011 at 9:21am
    California law does protect your client but the letter shouldn't be so broad and "template" like that. I have a great Real estate attorney that you may want to speak to and have your seller speak to:  call attorney John Mansour @ 909-941-1611.  He's very knowledgeable and advises our office and our clients.
  • Tara Polley June 3, 2011 at 8:47am

    Hi Rob,

    Because it's a non-deficiency state, the lender could only pursue a deficiency through a judicial foreclosure, which is rare. If it is "purchase money", they will not be able to pursue a deficiency through short sale. If a 1099C is issued, and it is a primary residence, the borrower may qualify for the "Mortgage Debt Relief Act of 2007" when filing their taxes, which would protect them from paying taxes on the forgiven debt.

     

    Hope that helps. :)

  • Rob Regan June 1, 2011 at 9:48am

    Vicki & Harry - that's a testament to how great shortsalesuperstars is - that I didn't think to go to CAR first.  Thank you, that document is exactly what I was looking for.  And agreed - he needs to speak with a tax expert.  Thanks for that tip as well!!!

     

    My take, given my seller's situation (first lien, purchase money) is that he should be ok.  Hopefully that's what he believes after speaking with an expert.

  • Vicki Lloyd June 1, 2011 at 5:23am

    I would have him speak with a tax expert rather than an attorney.

    The California Association of Realtors has some info on this subject :

    Short Sale Deficiencies

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