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California Expands Mortgage Deficiency Protections in Short Sales

Posted by attorney Kelly Zinser

Last year, California passed a law that prohibits first mortgage holders from pursuing individual homeowners for a deficiency after a short sale. However, this meant that second and third mortgage holders were still free to sue the homeowner for the balance due even if they consented to the sale, unless the short sale documents themselves included some protection. Senate Bill 458, which just became law in July, fixes this loophole and extends the prohibition to cover short sale deficiencies from all residential mortgages, and not just the first mortgage. It also prohibits a lender from requiring the homeowner to make a cash contribution in order to complete a short sale.

Unfortunately, there is no way to compel a bank to agree to a short sale, and the law applies only to short sales and doesn’t affect foreclosures. Because this law only applies to short sales, I worry that it may make short sales more difficult. This law is a step in the right direction. Now only if Sacramento could fix the deficiency issues when there is a foreclosure, then that would really level the playing field.

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