07/19/2011 By: Carrie Bay

A new California law bars junior lien holders from pursuing borrowers to collect outstanding loan balances after a short sale has been completed.

 Gov. Jerry Brown signed SB 458 into law on Friday. It requires all lenders that agree to a short sale to accept the approved sale price as payment in full of the outstanding balance of all first and secondary loans.

Last October, California enacted SB 931 mandating first mortgage holders absolve borrowers of any debt deficiency not covered by the short sale price, however that rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.

Local Realtors are hailing the new law as a big step forward for the state’s distressed property market.

“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 Beth L. Peerce, president of the California Association of Realtors.

“SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – 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,” Peerce said.

SB 458 contains an urgency clause making it effective immediately. The bill was authored by state Senate Majority Leader Ellen Corbett (D-San Leandro) and initially introduced in February.

San Diego-based DataQuick says short sales made up 17.6 percent of California’s home resales last month.