On January 1, 2011, a new law became effective in California.
Code of Civil Procedure Section 580(e) provides as follows:
(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. 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.
(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.
In layman’s terms, under the new law, a first deed lender who agreed to a short sale in writing is obligated to accept the proceeds from the short sale as a full payment of the loan and cannot go after the borrower for the unpaid balance of the loan. In sum, the short seller/borrower will be automatically protected against any deficiency judgment from the first deed lender.
However, there are some restrictions to Section 580(e), including:
1. The automatic protection applies only to first deed of trust or first mortgage;
2. Applies to one to four unit residential properties;
3. Does not apply if the borrower has committed fraud against the lender or waste against the property; and
4. Does not apply if the trustor or mortgagor is a corporation or political subdivision of the state.
Further, it is important to note that Section 580(e) became effective on January 1, 2011, and therefore is unlikely to apply to short sale transactions that took place on or before December 31, 2010. As with all new laws, it will be interesting to see how Section 580(e) will be implemented and interpreted by the courts in light of all the pending and newly-filed foreclosure-related lawsuits. For further information on CCP 580(e), many analyses can be found here http://www.google.com/#sclient=psy&hl=en&q=CCP+580(e)+analysis&aq=f&aqi=&aql=&oq=&gs_rfai=&pbx=1&fp=ea5733a97aebfa72id=4983247
Anh N. Nguyen, Esq.
Regal Law Office
Phone (310) 755-2508
Fax (310) 755-2572
**The opinion above is not intended to be legal advice nor should be treated as such**