There is a lot of incorrect information out there about the short sale process. This video is intended to help homeowners separate the right from the wrong and enable them to make a more educated decision about their home.

Some of the topics covered in the video

• Debt Forgiveness and Senate Bill 458 (SB 458)
• Tax Implications
• What happens to your Credit
• Fees and Costs associated with a Short Sale
• Proving a hardship

For more information, check out our Short Sale Video Page or contact us directly.

Senate Bill 458

SB 458 came out July 15th, 2011 and 8 months later I still get prospective clients, attorneys, cpa’s, Realtors, and other supposed ”industry insiders” ask me if mortgage lenders have the right to pursue borrowers after a short sale.  The answer to simply NO.  I love being able to tell clients this, and have a law (now civil code 580(e)) to back me up and take the guesswork out of short sales and the ability of banks to pursue a deficiency afterwards.

sb 458 corbet anti-deficiency law explained:

This law expands on short sale anti-deficiency legislation passed in 2010 called Senate Bill 931 (Ducheny) which was enacted in response to the fact that borrowers could have greater liability after a short sale than after a foreclosure. SB 931 prohibited a lender from pursuing a deficiency judgment against a borrower on a first mortgage or deed of trust. Since SB 931 only applied to first mortgages, homeowners with a second or third mortgage could still be liable for the remaining balances on those ‘junior’ loans. SB 458 corbet anti-deficiency law addresses that issue and puts it to rest… allowing many short sellers in CA to sleep at night.

458 in California

So why is sb 458 in California and not other states?  I can’t really answer that, other than to point to the fact that CA has been one of the most heavily hit states during the housing crises and we have a very litigious and liberal background… therefore consumer rights (in this case) are protected.  There are other ‘non-deficiency’ states out there but many short sellers outside of California are finding themselves being pursued by their lender after the short sale is completed.

How Senate Bill 458 affects Short Sales

This biggest concern that I have had is how Senate Bill 458 affects Short Sales and how Junior liens (2nd and 3rd mortgages) will respond.  After SB 458 was chaptered into law in 2011 I was immediately of the thought that junior liens would rather let the property go to foreclosure than settle for the typical $3,000-$6,000 that a first mortgage would offer through a short sale.  8 months later, across the board, I would say that many junior lien holders and lenders are requiring more money… but now they can’t ask the seller for the money.  We have to get the buyer to pay for this additional money to settle the liens.  With some of the more aggressive lenders such as GreenTree, NavyFed, PNC, and credit unions we are finding that they would happily let the property foreclose if we can’t get them the amount they want, because they have the ability to go after the borrower if it forecloses in some cases.  If they accept the $3,000 and allow the short sale they won’t have the right to go after borrowers any longer.  So it’s created some difficulty but overall I’m very happy with the new law.  It takes a lot of the guesswork out of short sales and with an increasing number of Realtors who are starting to handle short sales, that quite frankly shouldn’t be… the law makes it so the Realtor no longer has to make sure the lender will waive deficiency rights on the short sale.  In the litigious state of CA, that’s a good thing for all parties involved.

It’s important to note that one of the major short sale loopholes in California (and Fed) is going to expire at the end of 2012.  My market being San Diego, this is crucial for our clients.  Currently, if a borrower completes a short sale they are guaranteed to have the debt forgiven in CA due to new Senate Bill 458 that came out July 15th of 2011.  That is great, but then that creates a seperate liability because the are guaranteed to get a 1099-C for the forgiven debt early the year after the short sale is completed.  That 1099-C will equal whatever the amount of forgiven debt was in the short sale, and it will be viewed as ordinary income by the IRS.  For instance, if a seller owes $400,000 on their loan and the short sale yields $300,000 net to their lender… they will recieve a $100,000 1099-C by January 31st the following year.  The easiest way to avoid having to pay taxes on this ‘income’ is to qualify for the Mortgage Debt Forgivness Act.  To qualify, a borrower must have purchase money loans (or non-refinanced loans) and be able to qualify the property as their principal residence at the time of the sale.  If these two criteria can be met a borrower does not pay any taxes on the 1099c for forgiven debt.  The Mortgage Debt Forgiveness Act is set to expire for both CA and FED at the end of 2012.  It’s not certain whether this will be extended… so we advise all borrowers considering a short sale to look at getting the process started by March 2012 to ensure completion before the end of the year.