A new California law now ensures that any lender who agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans, regardless of whether the lender is a senior or junior lien holder. The new measure, signed by California Governor Jerry Brown on July 15, goes into effect immediately.

Last October, California passed a law requiring primary mortgage lenders to accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but the rule did not apply to junior or second lien holders. The new law extends the requirement to junior or secondary lenders and ensures that once a lender has agreed to accept a short sale payment on a residential property (one to four units), all lien holders – 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.

The new law is considered a victory for homeowners, according to the California Association of Realtors, which sponsored the bill, SB 458, authored by Senate Majority leader Ellen Corbett (D-San Leandro). “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.  

The new law does not apply if the short sale seller is a corporation, an LLC, or a limited partnership. It also prohibits a lender from requiring any “additional compensation” other than the proceeds of the sale in exchange for the lender’s approval.

REALTORS®  hope the new law will improve the short sale process for distressed sellers. “This provision also attempts to address instances when lenders have demanded additional compensation as a condition of their approval. It is now illegal for a lender to require such payments,” said Gene Lentz, president of the Silicon Valley Association of REALTORS®.  

The new law still preserves fraud and waste as exceptions to its protections, such as a lender seeking damages for a borrower’s fraud or waste. The law applies to any short sale transaction which closes on or after July 15, 2011. It does not apply to short sale transactions that closed prior to that date.

The Silicon Valley Association of REALTORS® advises short sale sellers to still consult with appropriate professionals to evaluate all issues that may impact their decision to pursue a short sale process, including adverse impact on credit and tax consequences.”