Senate Bill 931 which enacts California Code of Civil Procedure §580e became effective January 1, 2011.
C.C.P. §580e prohibits recovery of a deficiency on a first deed of trust following a short sale of real property of four (4) units or less because C.C.P. §580e(a), read, in part: “….Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as FULL PAYMENT and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.” (Emphasis added).
This means you should not get a 1099-A or 1099-C from the holder of the first deed of trust following a short sale! For more information on 1099-A or 1099-C, please read our blog: If You Are a Distressed Homeowner Facing a Short Sale or Foreclosure, Read This Article!!
What C.C.P. §580(e) does not address are second deeds of trust or other non-purchase money loans on real property. Lenders with second or third deeds of trust and/or lines of credit may still, and have been, suing short sale borrowers to recover monies borrowed.
The question then becomes, what is the state of the law for when both the first and second deed of trust were used to purchase the property? Interestingly in 2009, the Northern District of California, ruled that a second deed of trust, made concurrently with a first deed of trust for the purchase of real property is a purchase money loan within the meaning of C.C.P. §580(b). See Herrera v. LCS Fin. Servs. Corp. (ND Cal. 2009)
BEWARE OF SCAMS TO COLLECT ON
PURCHASE MONEY 2nd or 3rd DEEDS OF TRUST
The Herrera case holds that purchase money 2nd or 3rd deeds of trust are subject to anti-deficiency law as outlined in C.C.P. 580c. Some lenders are attempting to collect on junior purchase money deeds of trust after foreclosure or demand a deficiency in a short sale.
The lender is not entitled to demand a deficiency after foreclosure on a purchase money 2nd or 3rd deed of trust.
Any attempt to collect on an uncollectable debt, without the collection agency stating re-payment is not mandatory, may be grounds to sue the collection agency for violation of California Fair Debt Collections Act.
STRATEGY TO REQUEST MINIMUM OR NO DEFICIENCY ON A PURCHASE MONEY 2ND OR 3RD DEED OF TRUST UNDER A SHORT SALE
As a realtor, if you are negotiating the short sale with a junior purchase money deeds of trust, you must make it clear to the lender that through the short sale, the lender is actually saving: (1) months of non-payments on the loan, (2) months of vacancy, (3) costs of foreclosure proceedings, and (4) costs of resale. In addition, there is no right to a deficiency after a foreclosure. Disclosure of these realities should create a stronger bargaining position to facilitate a short sale for a minimum or no deficiency.
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