DISCLAIMER: We are not attorneys and you should always see a qualified attorney to understand your rights as they pertain to your specific situation. If you need the name of a good attorney in this area, please contact me and we will gladly point you in the right direction. To conduct a search to view the exact current legal code, click here. Legal changes may alter the applicability of this page.
In California, our clients are blessed by a number of legal code statutes that either protect them directly, or make meeting the client’s short sale demands preferable to the Short Sale Lender taking the home to foreclosure and remarketing the home. It would be too lengthy to explain all of the ways in which we use this information, but very few agents cite the applicable legal code to the negotiators or even understand how to properly leverage that information. Done in the right way, many negotiators will back off and simply push the deal through because the client is clearly aware of their legal rights:
This section addresses the “Single Action” rule in California. Should a Lender pursue a Non-Judicial Foreclosure (the most common in California), then that Lender will have no right to pursue the Borrower for the balance. Until the modificaiton to 580e, effective January 1, 2011, this provision was our greatest leverage point to obtain deficiency releases from the primary Lender.
For all Lenders, regardles of lien position, a deficiency judgement may not be pursued against the Borrower on Purchase Money Loans following a foreclosure. If your existing loans were the ones taken to secure the property on the day you assumed title, then this statute should apply. This is why one of our first questions is whether the loan was refinanced. It would also likely not apply if you opened a home equity line on the date of purchase, but did not actually use the funds towards the purchase – hence the name “Purchase Money Loan”. In California, many purchases were made with the help of a second loan to avoid paying mortgage insurance on the primary loan. It is very important that the homeowner is aware of this protection, along with the Lender, because in the even of a foreclosure the debt would otherwise be absolved. We regularly get deficiency-free approvals for refinanced loans, but “purchase money” makes the negotiation easier.
Starting January 1, 2011, no holder of the first trust deed (primary Lender) may pursue a deficiency after allowing a short sale. While we still fight for a clear approal letter waiving the deficiency, we used to have to use the indirect power of 580b to force that language. Now, several Lenders including Bank of America, have changed their boilerplate approval to explicitly waive the deficiency rights without argument.
Update: As of July 11, 2011 and the passage of SB 458, no holder of any mortgage lien may pursue a deficiency judgement after allowing a short sale. This extended deficiency protection to second mortgages among others. Note that some exemptions exist to 580e and it does not apply to certain situations such as homes owned by a corporation.
A Lender has 4 years to pursue a judgement against an unpaid debt. Very few agents or Borrowers are aware of this statute. This statute is typically interpreted as 4 years from the last payment. A common trick by collectors is to ask for a very small payment, such as $20, to get them off the phone or for some other promise. Many Borrowers will make the payment because it is so manageable, not realizing that their statute of limitations has just been completely restarted. Conversely, time already into the statute can be used as a point of leverage. As another important point of information on this topic even though it does not pertain to the short sale itself, once the statute does expire the collector may still bring a lawsuit, at which point it is very important that the Borrower defends themself with proof that the statute of limitations has actually expired.
The Rosenthal Fair Debt Collection Practices Act controls what is acceptable practice by debt collectors. While you might wonder how that would apply to a short sale, there are two main factors. First, harrassment is illegal under this Act. If you are being called incessantly by collectors, we have a form letter that will stop the calls. If they do not quit calling you after being served the letter, they are subject to prosecution and damages. Secondly, the manner of negotiation might be interpreted in violation of this act if the pressure exerted on the Seller is considered unconsciable or unfair. Understanding how that could be interpreted and calling the negotiator on these practices may cause them to simply push the deal through rather than chance any legal action.