Senate Bill 458 Signed into Law
California homeowners who are considering a short sale and wondering about the consequences of this decision can rest easier effective immediately.
Governor Jerry Brown just signed Senate Bill 458 into law. Senate Bill 458 expands upon previous short sale anti-deficiency laws. The previous law (Senate Bill 931) allowed homeowners to sell their homes at a value less than their existing first mortgage value and the mortgage holder would accept the short sale as full payment of the obligation. That is, the first lien holder was required to waive the right to pursue a deficiency judgment against the seller.
The new law, Senate Bill 458, applies the same treatment to any secondary, or junior loans involved in the transaction. In other words, upon accepting the terms of the short sale, junior lien holders now agree to waive their right to pursue the deficiency judgment. The borrower cannot be required to owe or pay for a deficiency in a short sale.
Here’s what the California Association of Realtors® has to say on this late-breaking news:
Although a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval, the new law does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale. A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, agents, relatives, and the like.
Exceptions to the new law include a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, LLC, limited partnership, or political subdivision of the state; a lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.
This is a huge coup for the California short sale world. Not only will it make the decision to participate in a short sale a little easier for some California short sale sellers to stomach, it will definitely also impact the balance of power when considering which is better… short sale or foreclosure.
Have any thoughts on the matter? Please feel free to share them in the comments box down below.
Photo: flickr creative commons by roger4336
Short Sale Expeditor
{ 75 comments… read them below or add one }
Awesome news! I’ll go ahead and ask the question because I know thousands of people are thinking it. What if someone did a short sale last year….is their 2nd/jr. lien subject to this law? Or does S.B. 458 only protect a 2nd lien starting today and to the future?
The law is ‘from this day forward’. So any closings prior to July 15 are not covered by this new law.
Excellent news for short sale sellers that CA Senate Bill 458 passed and was signed into law, so that upon accepting the terms of the short sale, senior and junior lien holders agree to waive their right to pursue any possible deficiency judgment (California one action rule).
Issue remains how to convince lienholders to submit short sale approval letters accepting this as full payment in complete satisfaction of the debt.
This will definitely be an issue, and thanks for chiming in. As early as yesterday, I’ve already had 2nds demanding prom notes–something they were not doing the week before. Can’t say for sure whether that is attributed to the new bill, but it sure it highly likely.
I hired a company to do a short sale for me in 2010. I was promised W2′s for both 1st and 2nd liens. The company purchased the property all cash from Chase for $500,000 and sold it the next day for $750,000. This was a law firm/real estate brokerage acting as the broker. At no time did I recieve the acceptance letter from Chase stating that I, the borrower, would be responsible for any and all deficiencies. 6 months after the close of sale I was in collections for $500,000. I was eventually 1099′d for the 1st but the 2nd is persuing me for $190,000. They have no judgement, they ave not sued. My question is… can they? My sale pre-dates the law but does this law prohibit a law suit and judgement lien? Either way I am persuing the crooks who ripped me off and made 1/4 million off of my hardship then left me holding the bag.
SB 458 is effective from this point forward. So, anything that closed prior to that would probably be a legal issue to sort out separately.
Hmmm … If it was a real estate broker/law firm that represented you, you may consider retaining another real estate attorney to advise you whether the real estate broker/law firm breached any fiduciary duty owing to you. Generally, an “agent” owes a fiduciary duty to a “principal”; generally, real estate agents cannot earn “secret profits” and law firms cannot enter into transactions with their clients in the absence of a written consent.
This is my personal opinion and not the opinion of my employer. This is not legal advice and should not be relied upon as such. No attorney-client relationship has been established. Additional facts may be present that may otherwise change the outcome.
Allen Cutler … I am responding to your comment here about your hiring a company to do your short sale. It sounds like that’s where your problem started. You probably should have hired a qualified Realtor instead to do the short sale – not a company or third party. You have described a serious situation involving legal issues and should hire a lawyer as soon as possible.
My concern is, will 2nd. lienholders just make the Seller declare Bankcrupcy, as there is no benefit for them to co-operate. I can’t imagine Banks giving up any profit, without inflicting pain on those that create the loss..hence force the client into Bankcrupcy. Any alternate thoughts would be welcome.
Thank you.
Stuart – I do not see it much different than it is now. The Juniors can be stubborn wanting more. The counter to them has always been, you can have some or none; which do you want.
I do see them potentially being more difficult and choosing none now since they know they cannot try to get a deficiency judgment. It all depends on their finances and which one will profit them more.
I think one of the keys to disarming them is publicity. If the 2nds really start hindering the process they need to be exposed. Firsts were notoriously tough in the beginning but the backlash from the public and CAR made them loosen up a bit and begin to get their act in order. Hopefully the same can be done with the seconds.
If they are smart they will realize letting short sales go through will benefit them more long run since it will help get the economy performing better, which raises confidence, which will have the affect of raising everything else. Yea, I know I am expecting them to act rationally – occasionally I like to joust windmills.
I think that we might see them going towards prom notes–just as they did a few years ago. In fact, we’ve already seen a few of those in our office in the last day or so. It’s grasping at straws (or jousting windmills), but it’s about all that they (junior lien holders) have at this point. Thanks for stopping by!
Hi,
Great news for Cali…Do you know what the short sale laws are in other States ie Florida,Kentucky? And most importantly does your company handle out of state Short Sale transactions for Investment properties ? If so what is the base fee for your services ?
We provide short sale and distressed property education throughout the US, but focus predominantly on negotiations in our home state.
If the juniors won’t approve the short without a consideration from the seller, will they demand a bigger percentage from the primary? My worry is that if the primary’s net is reduced further by demands from the junior, they may decide foreclosure auction (or REO) will net them the same and will decline the short. Any thoughts?
As part of SB 458, the juniors cannot ask for a cash contribution. From the state of California website…”The bill would prohibit the holder of a note from requiring the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.” So, I think it still makes sense to short sale in most cases.
Thanks, Melissa. I understand the juniors cannot ask for a cash contribution. However, we are now asking them to approve a short in which they will get a much lower payout and may not reach their liability threshold. If they don’t change those thresholds accordingly, they will be unable to approve shorts, which of course nullifies whatever deal the primary agreed to with the seller and leaves the seller on the hook for full deficiency payment or foreclosure. The prom notes you mention above – are those agreed to by the sellers in the hopes of getting a short through, or is it proposed by the juniors in the hopes of catching what they can?
Alex – we really don’t know what SB 458 will do to the whole process. There are so many issues at work and it will be interesting (for the lack of a better word) to see how it all shakes out. Potentially we see:
1. Firsts can’t ask for contributions from the SELLER so they might be a little tougher and might get aggressive against the agents (compensation reduction) or ask the buyers to pay more (counter offers)
2. Seconds cannot get deficiencies so they may demand more from the Firsts; but then they run the rick of getting nothing if it goes to foreclosure.
Thanks, David. Appreciate the time. It will definitely be interesting to see how this works itself out.
We’ve seen a lot of the things that you mention this week in our office. Specifically, now some banks are saying that voluntary contributions are okay (as well as money from the buyer or from the agents). Here we go again with the beating up of poor agents who are having a tough time making ends meet. I’ve discussed the contribution situation with attorneys who all agree that it is quite a gray area.
David, we appreciate all of your valuable comments this week and always.
With this new law, can the second lender still give the seller a 1099S for the balance owing after a short sale?
Thank you!
Lisa – Income (phantom income, cancellation of debt income, forgiveness of debt income) is unaffected by SB 458. Income and Deficiencies are separate issues. Income relates to the IRS while deficiencies relate to the lender.
I’m struggling with the fact that this law only applies to short sales after July, 11 2011. We short sold our home and closed June 2010 and now the second is coming after us for the deficiency of 100k. We will be forced into bankruptcy, because this law won’t protect us. Why doesn’t the law protect everyone with short sales?
Amanda,
I have asked 7 Real Estate Attorneys the same question by telephone today. Can’t get a straight answer unless I’m willing to walk in today with a cashiers check for $3500.00. I simply want to know if I have a leg to stand on with Bill 458 or if I should settle. I don’t have $3500.00 to donate to an attorney to answer the question, “will bill 458 help me with the pending 2nd lender lawsuit if my short sale was in 2010 but no settlement agreement has been reached yet?” Joe
Joe and Amanda -
Did you refi and take money out of the house? My impression is that if the second loan was money for purchase, they do not have the ability to recoup any deficiency following a short sale, certainly not from the seller. Any negotiation should have been with the first, and I’m not even sure how you got approval from the second unless they were satisfied with the offer from the first.
Can you offer some clarity into your situations?
Thanks!
-Alex
Amanda,
CA SB 458 was signed into law and is not retroactive. If you closed your short sale prior to July 11, 2011, when Gov. Brown signed it into law, this will not impact or help your situation. Best wishes.
Small point but potentially important…
The bill was signed July 11 but was not chaptered until July 15 by the Secretary of State. As I have understood my research the law becomes law at chaptering and not signing. So, if I am correct the proper date is July 15 and not July 11. I got this info from the Sec of State website: http://www.sos.ca.gov/admin/bill-chapters.htm
If anyone has further clarification I would be interested in hearing it. As I said it is a minor point and would only affect short sales between those 5 days.
Hi Alex!
Our second was a refi and we did take money out. The second only received 3,000 from our first, but they had us sign a paper at closing that stated that they could come after us for the remaining balance. 1 yr later we are getting collection calls for 105k.
I feel for you Amanda but from what I have read in your posts you are on the hook for the amount due since you signed a promissory note. SB 458 is not a help for you since your contract with the second was signed in 2010.
I would be interested in who the second lender was and who is going after you for the $105K. I have heard that lenders are selling these notes very cheaply to collection agencies who then try to get money for the consumer ( IE you). You might be able to negotiate with the collection agency and get the cost down. The sonly other way I know of cutting them off is via bankruptcy. (this is not legal advice just education based on experience.)
David is probably right about SB 458, signed into law on July 11, not chaptered until July 15 by the Secretary of State.
However, if someone had a short sale close between July 11 and July 15, and they were not protected against junior lienholder, they could file a lawsuit and ask the court to invoke protections for them on SB458 against the junior lienhoder.
On the other hand, a junior lienholder would argue that its decision whether to participate or not in the short prior to July 11 or 15 was based upon law in place at that time.
The court would probably not force this down the throat of a junior lienholder who agreed to the short sale without knowing that the new law would prevent them from filing a lawsuit for the deviciency.
Everyone is concerned about deficiency judgments, and rightly so. It will be interesting to see how this plays out in court.
Hi Mellisa my name is Alex and I need your comment I just sorth sale my property at end of september 2011 and second got $6000.00 from first, second sued me about 6months before demanding all monies aow to them I default court and the second obtein a judment against me after all this and they seen I may sell the property we sign a contract for repay 1/3 of total, questios is shall repay this 1/3 ar shall asking them forgivnes because of thiss bill? please give your comment.. thank you Alex
Is the subject property in the state of California?
First off, best to consult with an attorney. However, as long as the deal closed after 7/15/2011, you sound like you might be able to take advantage of SB 458. Maybe your lender doesn’t realize it, and you could advise them. If you get nowhere, I would seek help from an attorney. Good luck.
Senate Bill 458. My attorney thinks that area 580e of the document mean that the lender would have to be in agreement with the seller at the time of sale in order for a deficiency judgement to be waived. That means the bill cannot help someone who has already signed a doc stating that their lender can/will come after them for a judgement after the shortsale. This bill will more than likely just make banks decline to endorse short sales and prefer to see the property foreclose so the bank can still pursue a judgement. Further, squatters will stay in these properties longer and an already slow real estate sales market will slow even more as even short sales will drop. Perfect storm. Too bad we’re not all too big to fail.
Hi
I had a short sale in March 2010 and now the Second loan holder is taking me to court trying to collect my court date is Feb 2012. Would this SB apply in my case since I haven’t started payment.
Hi Dalia,
According to the attorney I just retained. No, SB 458 won’t help because if you look at the area 580e part, it states that the holder would have to be in agreement. If I were you, I’d at least try to find a real estate attorney who will allow for a free consultation. Perhaps they might see it differently. I retained the only real estate attorney that seemed to have an idea about the new law. It turns out she really didn’t, I educated her that it WAS a law signed by the governor. He fought me for a while at whether it was a proposal or an actual law… weird to be have paid to retain and then have to fight with your own attorney to prove there is a law in place. Once he realized there IS a new law, he asked for a couple days to analyze it. That’s when he told me it wouldn’t help. So I am paying him now to help negotiate a very steep judgement for something more manageable. If you truly have until Feb. 2012 until you’re in court, I’d save as much money as you possibly can between now and then and make an offer in hopes that they may take that amount as a settlement. The alternative is bankruptcy. I wish I had better news… but I’d still seek a consultation with a real estate attorney, perhaps you’ll find one that sees the law as signed under emergency with the intent of “helping” people. I understand the banks position that they lent money and expect it back… I don’t fault them for that. I guess I just wish that those that govern would pass the bailouts to the little people and not just to GM or Goldman Sachs. If one of us is to fail, let us all fail. Joe
Greetings Dalia
SB458 will not help you. It is an emergency statute which means it goes into affect immediately (July 15) but has nor provisions to back date. Your agreement date is what governs your situation; not the date you are set to begin payments. Your best bet is to try and negotiate a lower settlement. Sorry, I know that is not what you wanted to hear.
David
Dalia at her prior comment here said she finished her short sale during March 2010. CA SB 458 was signed into law last month and is not retroactive. Since Dalia closed her short sale prior to July 11, 2011, when Gov. Brown signed it into law (or when the law was chaptered several days later), this new law will not help her situation.
As a Realtor and broker in Orange County, CA, also a real estate lawyer, I carefully read the bill prior to its being passed in Sacramento, then again the day it was passed and then signed into law.
See the text of CA SB 458 at http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_458_bill_20110715_chaptered.html.
All this means is that purchase money 2nd liens will take what they get and all others will refuse unless they recieve the line in the sand pre determend. We will see alot more foreclosures. 2nd’s are tired of being treated as second class banks. They have already started refusals and not offering Promissory notes. All of the banks will probally do this in California. Good luck!
Hi,
would anybody know how this SB458 would apply for equity lines of credit. on 2nds ??? thank you
As I understand the law, any Junior loans, including HELOCs (equity credit), are protected from deficiency judgments if they agree to the short sale offer in writing and cannot include any language about reserving rights to go after the deficiency.
Check with a RE attorney for your specific situation but from everything I read all types of Juniors are now cut off.
so to be clear, for any shortsale after the bill the 2nd cant come after us. however, as noted above, some 2nds will want more for them to agree to the shortsale. I have heard title companies not allowing the seller to bring in additional funds at close to give to second…but i see above that i can bring funds. Is this true? that would help out because if i were not allowed to, the 2nd will definitley not agree to the little amount the 1st will give them.
None of the liens can ask the seller tho bring more money to the table. However the seller can volunteer more funds and the lien holders can ask others to sweeten the pot i.e. The buyer, the agents, etc. I have never heard Title companies preventing sellers form contributing and I am not sure why they would want to block it.
More on the seller contributing that just popped into my head. The money must all be disclosed on the HUD1; nothing can be done under the table.
Dave
Just to add to your comment – I’ve quoted the exact language in SB458 and it says something about being prohibited from requiring. After speaking with attorneys, all agree that this is a bit vague.
Excellent add Melissa, thanks for clarifying my statement, you are right on. And a foresee lots of litigations clarifying 458.
This new law amended Section 580e of the Code of Civil Procedure to read:
580e. (a) (1) No deficiency shall be owed or collected, and no
deficiency judgment shall be requested or rendered for any deficiency
upon a note secured solely by a deed of trust or mortgage for a
dwelling of not more than four units, in any case in which the
trustor or mortgagor sells the dwelling for a sale price less than
the remaining amount of the indebtedness outstanding at the time of
sale, in accordance with the written consent of the holder of the
deed of trust or mortgage, provided that both of the following have
occurred:
(A) Title has been voluntarily transferred to a buyer by grant
deed or by other document of conveyance that has been recorded in the
county where all or part of the real property is located.
(B) The proceeds of the sale have been tendered to the mortgagee,
beneficiary, or the agent of the mortgagee or beneficiary, in
accordance with the parties’ agreement.
(2) In circumstances not described in paragraph (1), when a note
is not secured solely by a deed of trust or mortgage for a dwelling
of not more than four units, no judgment shall be rendered for any
deficiency upon a note secured by a deed of trust or mortgage for a
dwelling of not more than four units, if the trustor or mortgagor
sells the dwelling for a sale price less than the remaining amount of
the indebtedness outstanding at the time of sale, in accordance with
the written consent of the holder of the deed of trust or mortgage.
Following the sale, in accordance with the holder’s written consent,
the voluntary transfer of title to a buyer by grant deed or by other
document of conveyance recorded in the county where all or part of
the real property is located, and the tender to the mortgagee,
beneficiary, or the agent of the mortgagee or beneficiary of the sale
proceeds, as agreed, the rights, remedies, and obligations of any
holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee,
or guarantor of the note, deed of trust, or mortgage, and with
respect to any other property that secures the note, shall be treated
and determined as if the dwelling had been sold through foreclosure
under a power of sale contained in the deed of trust or mortgage for
a price equal to the sale proceeds received by the holder, in the
manner contemplated by Section 580d.
(b) A holder of a note shall not require the trustor, mortgagor,
or maker of the note to pay any additional compensation, aside from
the proceeds of the sale, in exchange for the written consent to the
sale.”
I don’t see that last paragraph language as vague. It’s clear to me that the legislature intended that maker of the note should not be asked to pay additional compensation to get a short sale approved. However, there is money to be made by lawyers representing those who fight lenders about whether they wrongfully turned down the short sale or whether they wrongfull foreclosed. So lawyers will probably struggle against this language until it is clarified more by courts of appeal.
There lies my dilemma. I was about to close last week but the 2nd wanted around 5,000 more and will not budge. The 1st will not give any and already both agents have contributed. The title company is telling me i cannot bring funds to the table and i am telling them i am volunteering funds. So im in danger of foreclosing because the title company said their Real estate lawyers know what they are talking about?!? Who wrote the italic paragraph in this site? It states i can pay or even relatives can contribute. I assumed this was in the bill but dont see it in the actual bill.
That paragraph in italics is from the California Association of Realtors® website.
Marlon, I would assume you have a real estate agent involved. I would get the broker to step in and figure out what is going on and why.
Harrison: In that last paragraph, I wonder why they used the word require and not request or some other word. What say you?
This new California law amended Section 580e of the Code of Civil Procedure to read as follows at (b): “A holder of a note shall not require the trustor, mortgagor,
or maker of the note to pay any additional compensation, aside from
the proceeds of the sale, in exchange for the written consent to the
sale.”
The legislature used the words “shall not require”, because it does not appear to be vague. The alternative words “shall not request” would have been vague and caused even more challenges. The clear language will prevent 2nd lienholder from making short sale approval conditional on obligor paying anything more. However, this will not prevent 2nd lienholder from taking a strong position that the first or other lienholders should take less.
Plaintiff lawyers will be busy and gearing up their anti-foreclosure lawsuit platforms now and getting clients from the those who are unhappy about getting their short sales declined or what they believe to be wrongful foreclosures.
The legal cause of action for “wrongful foreclosure” in prior years meant that the lender foreclosed mistakenly when the money was not owed by obligor. This cause of action will be stretched to include “wrongful foreclosure” when obligor thinks they were treated wrongly by the short sale negotiator, or that they got their feelings hurt by lenders in some way, or that the deed of trust was not owned by the entity that foreclosed, or that the trustee who foreclosed was not given instructions for that by obligee on the note, regardless as to whether the money was owed by obligor.
We’ll see more lawsuits and eventually California court of appeal law decisions on 580e of the CCP.
I had to do a short sale on my home last year. It actually closed in Feb. ’11. BofA had both the 1st and 2nd (a HELOC, purchase money only, loan paperwork even refers to the 2nd as a “piggyback” to the 1st). Loans were originally Countrywide. Some time in ’10, BofA sold the second evidently bundled with a bunch of others to GreenTree…basically a collection agency. BofA agreed to the short sale on both 1st and 2nd, then about a week before the original scheduled closing date realized they did not have the 2nd any longer. We then had to extend the escrow into ’11 (fortunately as it turns out due to the laws) but then had nasty dealings with the 2nd holder. Eventually I paid $8,500.00 (every dime I could get) on the 2nd to get a release for the short sale. At first they said I would get a full release, then said no…they wanted about 3,000.00 more for that…I did not have it. (I paid on this loan for over 2 years though not working…selling off assets. I have been unemployed for almost 4 years, have no assets left.) They would not give me a release from liability of the $35,000 deficiency then created. After a few months passed, I got a call from GT. After discussing the situation with a rep, and California laws (580) relating to purchase money HELOC’s) he said he was surprised they did not give me a full release due to the amount paid. He said due to the situation, he would talk with his superior and call me back. He never did. Six months have passed, and now I received another call, another rep. I returned his call, left a message with the same info. I also asked that I be contacted only by mail. He never called again. Now someone else is leaving messages….from another state…not saying he’s from GT or collection (but must be, as I have absolutely NO other debt) or leaving any info. I have not returned the call. How do I get them to stop? I have no money, no assets left to sell. No income. As I indicated, it was purchase money only “piggyback” loan, which I understand should not be recoverable by them due to the law. Any ideas?
I think that you need to check with an attorney on this one. This was before SB 458 and this is not a foreclosure. So, perhaps an attorney can help you to deal with the collection agency–who actually may have a right to collect, despite that fact that this was purchase money.
Research the following and talk to an attorney: Simon v. Superior Court (Bank of America), 4 Cal. App. 4th 63 (1992)
Settled $198,000 deficiency with Chase for $9,800. Avoided bankruptcy. Suing for damages from those who conducted the short sale – purchasing the property using straw buyers and flipping it to an investor 24 hours later – sticking me with a year and a half long struggle and huge tax liabilities. These guys are so arrogant they offered me 10 k and are stonewalling my attorney (who is working on a contingency). I have turned it down and plan to report all of them (lawyers and real estate brokers) to the authorities for federal bank fraud. I’ll get the 10,000 in small claims – I hear the limits are being raised from $7,500. I may even contact Chase’s legal department and offer to share this interesting story with them.
The 1st lien holder PNC ($550k) is strategically trying to sabotage our sort sale ($400k). But, I’m sure many of you have already heard of thier stubborness. We continue negotiations with a private investor who purchased an $85k 2nd TD. The current offer is $15k. Does SB 458 encourage more 1st lien holders to foreclose and collect thier servicing fees from thier “investor” owned securities? Do the investors even know?
Shots ale in works in CA post SB458. Offer on home is 250,000. Bank wants what they call market value $277k and an additional $15,000 from the seller. When my agent reminds them that requiring additional funds from the seller is illegal in CA, the Firt Lien Holder says there is a loophole in the law that allows the request. Are you aware of said loophole? My agent suggests taking the offer (seller to request to pay only $10,000), and once the Short Sale goes through, take the First to Small Claims Court for the $10k. Is the First in the right?
Shortsale…1st and second value appx. $550K.
Greetings Bill. First I am not a re lawyer so this is not to be taken as legal advice. As I read the bill section 2b I cannot see any loop hole. The language is quite clear. The lender cannot ask the mortgagors or trustor for any funds.
I would suggest a meeting with a re lawyer to clarify but for them surface it looks like the 1st is breaking the law. To my knowledge 458 has not been tried in court yet so lenders will try to do what they can until there is case law.
Out of curiosity who is the 1st?
Side note: the bank is allowed to ask others (non seller) to pay including agents or the buyer.
Side comment: look at the conversation in this post dated Aug 26 and 27th. The ” loophole” is the unclear language of prohit from requiring but it does not specifically state profited from asking. That language nuance will most likely be the hing pin in any legal action that may come.
David: You are correct. The language is so vague that some banks may ask for a voluntary contribution and others will steer clear of the law altogether.
I live in AZ and I am contemplating a short sale on our primary residence (we have a first and second mortgage both are ARM). Not sure how it will affect my mother in law who is a CA resident that co-signed for us and she personally owns several homes in CA on her own. Not sure if it will affect her through IRS taxes or deficiency judgment? Any help or suggestions?
If your mother is on the loan and you stop making payments, it could adversely affect her credit. Great questions! Of course, you should check with a local attorney, but I would surmise that despite the fact that your mom lives in CA, the property is still in AZ and she would be subject to to all of the AZ regs.
My question is this:
For a property in CA, if the short sale falls apart because the junior lien holder refuses to settle for the amount the first lien holder is offering them as “good will” and the first lien holder then forecloses, does the second lien holder have the ability to seek a deficiency judgment, or does this new law prevent that?
As a California licensed real estate broker, I need to advise you to check with an attorney. However, from my experience, I can say that depending upon some different loan criteria (including when the loan was taken, what kind of loan it was, and who the loan was taken with), there may be some anti-deficiency protection.
I heard 2nd T.D holders lie in wait for a borrowers credit to improve 3-5 years later and then commence efforts to collect. A borrower may be more willing to settle when they are looking to buy again.
there is a statuate of limitations and i believe ca is 4yrs. After that they cannot do anything…correct?
I short sold my property in 2010 – it was an investment property. Chase bank issued me a 1099 on the 1st for $457,000 – the entire deficiency. The balance of the second ($198,000) remained. I recently settled that balance at 5% – just under $10,000. I had a big loss on the property which off set most of the tax liability. All good so far.
I was audited by the IRS and after my 1st 7 hour interview I have another meeting scheduled to present more documents related to the calculation of my basis in the property.
Here’s the kicker and the reason why I am writing: Chase has been aggressively pursuing me since 2010 for the same amount of the 1099c – they will not leave me alone. I recently received a letter threatening to sue me for a judgement. I have faxed the 1099 to 2 different collection agencies working for Chase, emailed it once, filed a complaint with the Consumer Protection Agency and spoken with the Chase Presidential offices. I have faxed them the same docs as well.
Correct me if I’m wrong but Chase cannot write off $457,000 against their massive profits, report it to the IRS as regular income paid to me, which I then reported on my 2010 tax return, sticking me with a huge tax burden then triggering an audit, then turn around and try to collect from me for the same amount. This should have been over a long time ago. Someone correct me if I’m wrong.
AC
OK, disclaimer: I am not an attorney nor a tax accountant; I recommend that you seek the advice of a professional in these matters to get the true facts for your situation. The following is not legal or financial advice:
Allen, you situation is quite interesting and sparked a good conversation here in my office. We are seeing Chase getting very aggressive of late. B of A and Wells are more selective but Chase is going for it.
The consensus here (opinion; not legal fact) is that Chase can go after you for the deficiency if their approval letter to you contained a reservation of rights clause; which it most likely has. If they do succeed in collecting from you then they would have to report that as income (off-setting their initial 1099c loss.) This answers part of your question.
Now the question turns back to you? Now that you have a loss (if you pay the $457k) can you offset your gain that you had in 2010? Possible – but check with your tax advisor for your specific situation.
You are posting this in the CA458 thread so if you are asking if that legislation helps you the answer is no since that law passed in July 2011 has no affect for short sales prior to it’s date.
Now, one thing you can consider is getting your politicians to fight on your behalf. I have had clients in loan mod situations getting a run around. They contacted their congressman (federal not state) and had their office go to bat for them. The bank did an immediate turn around and they got their loan mod. Not sure if this can help you but sounds like you are hitting the wall everywhere else.
I hope this helps you some and I wish I had a better answer for you. Again, a tax attorney’s advice should be sought.
Thanks,
After speaking with my attorney, the long and short of it is:
Once a 1099-C is generated it’s a done deal. the bank has written the debt off, informed the IRS of it, and reported this as income paid to the borrower (me). The borrower then is obligated to report this 1099-c on their taxes and deal with the taxes – this is considered regular income.
in my case, yes, I had a huge loss which off set the gain. I am presently being asked by the IRS to substantiate my basis in the property which I am able to do.
What Chase is trying to do is illegal and violates the Fair5 Debt Collections act. i have contacted Consumer Affairs and had this escalated to the executive offices of Chase. Basically, the right hand doesn’t know what the left hand is doing.
The debt was discharged in the year that the Form 1099-C was issued and the debtor no longer owes it. If the lender says that the debt was not discharged and the Form 1099-C was issued in error, then that leads to the second argument — the lender should be estopped from denying the discharge because it issued the Form 1099-C, thus leading the taxpayer (me) and the government to believe the debt was discharged, and the debtor (me) had to pay the tax on it as a result. That prejudiced the debtor by making him pay tax that he should not have paid if the debt was not discharged. As a result, the lender should not now be allowed to take a position contrary what was implied by the Form 1099-C. This defense is known as equitable estoppel.
So there it is. I have a solid case – I have the 1099-C – Chase needs to cease and desist. I’ll post the results.
A
Thanks for the info from your lawyer. Please update us on what happens next.
If you are doing a short sale who pays for property taxs?
Generally, the bank often helps to bring the property taxes current.
to submit a short sale, should we have a very low bank balance (or liquid asset)?
Well, banks prefer to process short sales with a verifiable hardship. But, not all short sale sellers demonstrate a hardship. Most do, but not all.
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