Ut Oh, California’s new SB458 bill that was passed a couple of weeks ago was intended to keep borrowers from having to repay their deficiencies on both their First and Second or Equity Line loans in the case of a short sale.  Unfortunately, it appears that it will work in the reverse.  Instead of protecting consumers from having to repay deficiencies after a short sale; it appears the banks will shut down negotiations for short sales altogether and opt for foreclosure instead.

The bill’s written perfectly for those that sold short already.  It’s no longer limited to purchase money loans; and it no longer excludes Second loans or Equity Lines of Credit.  SB458 specifies, in my interpretation (though you should discuss this with your attorney), for any lender on a property of 1-4 units whose loan is solely collateralized by the property is compensated by means of a short sale; they are no longer able to seek remedy for the deficiency afterward.

Just when some of the major banks like Bank of America; and now Wells Fargo, or any bank utilizing Equator as an organizational method, have finally hired (almost?) enough staff and stopped losing paperwork; and are actually accomplishing the completion of short sales in a more reasonable amount of time; this law unintentionally cut everyone off at the knees.

In Southern California, it’s customary for the First Loan to offer the Second an approximate $3,000 settlement for short sales; and, in most cases, it was accepted. I’m guessing this was because the Second/Equity Line of Credit holder could eventually pursue compensation through the courts with a deficiency judgment.

The author seemingly missed an unintended loophole.  A foreclosure still allows the lenders to seek a deficiency judgment.  What would be the incentive for either the First or the Second/Equity lender to choose a short sale any longer when they can still go ahead and foreclose and still have the right to pursue a deficiency judgement.  Unless this previously unnoticed omission in the Bill is quickly corrected to include protection for the consumer against a deficiency judgment in the case of a foreclosure, we may well have seen California’s last short sale.  The only way around this, to my knowledge, would be for these homeowners to take bankruptcy.  Then no one is the winner.  It leads to the consumer having ruined credit (worse than with a short sale); the Realtor’s are out of business unless you have an in with the banks to sell foreclosed properties (don’t even get me started on this); the banks expenses go up as a foreclosure is more expensive to close than a short sale; and my understanding is the banks are not allowed reimbursment of a deficiency judgment.

One can only imagine what this would do to the housing market, eh?  I’m working on a short sale right now.  After losing seven buyers all for different reasons, we finally have someone who will stay in the deal.  Unfortunately, the First and Second loans are not at the same bank.  Even though the First is offering $10,000 to the Second, the Second wants $27,000+.  I wonder where they think all that money’s coming from!  They already cut the Realtor’s commissions, they’re getting more from the First than usual and the Seller doesn’t have the money.  Unfortunately, these Seconds think the Buyers should pay it on top of the purchase price.  Does anyone out there think the home will appraise for those additional funds on top of the purchase price?  Even if the Second had incentive before the new law, they certainly don’t have any now.

Maybe all those folks that keep saying the banks have these stockpiles of foreclosed properties they’re waiting to release will be right after all…  YIKES!!

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