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New CA Law SB 485 Mortgage Deficiency Judgments – Seller/Agent Victory Or Victim Of Unintended Consequences


Oct 18th, 2011



As you should know from reading my Blog postings, the passage of Califonia’s SB458 on July 15th changed the game plan for doing short sales.  Its most important aspect was barring junior lenders from having recourse against the borrower/seller or even asking them for monetary contribution. Although the feared crash of short sales has never occurred as severely as expected, real estate agents have been struggling to get junior lender cooperation. What has evolved is a number of “work-arounds” to get the junior lenders satisfied and get the short sale completed.

A workaround is simply a method, sometimes used temporarily, for achieving a task or goal when the usual or planned method isn’t working.  In the case of short sales, junior lenders who aren’t satisfied with what they may get from the first lender’s sale proceeds and barred by SB458 from getting anything from the borrower may refuse to do the short sale and hope they can do better if they sue the borrower after the first lender forecloses. Here are a few of the ways that creative and successful real estate agents are working around the SB458 restrictions and saving their clients from foreclosure:

1. Get Money from Someone Else – SB458 simply says that no lender can request a contribution from the Seller/borrower as part of a short sale.  It does not say that a lender cannot get contribution from others.  First Lender: Typically the only money offered to junior lenders comes from the First Lender that gets almost all of the sale proceeds. Generally, first lenders make more money from a short sale than they could from a foreclosure but they regularly refuse to give the juniors any more than $6,000.  But if a foreclosure would bring much less to the first lender, they could be convinced to share more with the junior in order to net more for themselves through the short sale.  Buyer: It is the Buyer who is bringing the money to the table.  If the Buyer really wants the property, they may be willing to contribute money to the junior lender to make the deal happen. This might be workable into the Buyer’s loan.  Real Estate Agents: Although agents hate this, it is not unusual for lenders to look to the agents to cut their commissions and let the difference go to the junior lender.  This is a “something is better than nothing” approach that unfortunately penalizes the parties that have put the deal together.

2.  Voluntary Seller Contribution – SB458 states that a lender cannot “require” the seller/debtor to make any contribution. But nothing says that the seller cannot “volunteer” a contribution. While in reality, no-one generally voluntarily decides to give money when they are not asked for it, the drafters of SB458 allowed that a seller may do just that if they have the funds and they want to get the deal done.  Typically this will be in response to a junior lender responding to a short sale offer with a requirement that they receive $X more.  While this does not state who must pay this, the language of the request is that any other party in the short sale can do so, including the seller.

3.   Re-write the Buyer’s Offer – If the junior lender can’t be satisfied, then the deal could die.  If so, then some agents have gone back to the buyer and written a new short sale offer for a lower purchase price than the original deal… lower by the additional amount the junior lender wants to receive.  The new offer is submitted and, if the first lender accepts the offer terms, the junior lender counters at the original offer price with the increased money going only to the junior lender. This has been working.

4.  Discount the Junior Loan outside of escrow – If the first lender refuses to allow money to be paid by the seller to the junior lender, then the sale might die and the seller would face foreclosure. Instead, it is possible to put the escrow on hold and, outside of escrow, the seller could negotiate with the junior lender to accept a discounted payoff of their loan.  For example, the seller pays money to the junior lender and the junior lender accepts this as satisfaction of the debt and releases their lien.  Then the escrow is re-opened, only the first lender is left in the deal, and the short sale closes.  We typically are successful negotiating discounted loan payoffs for 10-20% of the current balance.

5.   Discounted payoff before short sale – For some sellers who are upside-down on a property but have substantial other assets, there is a danger in doing a short sale in that the Hardship Application process requires that they disclose their personal assets.  This can cause a junior lender to reject a short sale because they believe they can collect from the seller in a post-foreclosure lawsuit.  In such cases, it can be better to negotiate a discounted payoff with the junior lender before you ever start the short sale.  Now it is simply a business transaction: how much will the junior lender accept in exchange for a lien release?  Again, 10-20% is common but generally no financial statements are required. If this works and the junior loan is eliminated, then the seller may be able to proceed with the short sale knowing that first lenders will almost always accept the short sale terms.

All of the foregoing concepts are foreclosure-avoidance, short sale success strategies that real estate agents and their clients are actually using in today’s California real estate market. If you are having success with other creative approaches, please let us know. Remember: all agreements in a short sale must be disclosed to everyone and must appear on the Closing Statement (HUD1). No secret side deals are allowed. Secret side deals are mortgage fraud and could subject participants to severe legal consequences.

If you are a California property owner, consider our $200 Attorney Consult program that will help you determine all of your options and choose the best strategy to enable you to move forward as intact as possible.  To learn more, contact me at or call us at 916 966-2260.  If you are interested in discounted loan negotiations, please contact my Associate Attorney, Alex Munn, at or call him at the office.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.






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