Breaking News! California Short Sale Anti-Deficiency Law Expanded

42 Flares 42 Flares ×

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


  1. 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?

      • TW

        I think they need to go back and add on to protect previous short sale transactions. The fact is, that most of the hardest hit short sales were from last year and before from sales of 2005 to 2008 where the banks would lose a lot more money due to the prices of homes being at their highest price tags. Once again, I see the government leaving loopholes for the banks to once again come back a screw homeowners getting their life back in order only to be twisted all over again.

  2. 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.

    • Melissa Zavala

      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.

      • Hello,

        I may or may need legal advise or representation.

        I recently short saled a home, in California. The home bought in APR 2008. Re-Finance for better interest rate with VA streamline loan in early 2011 and accepted and approved short sale in June 2012. The lender sent this and now I see a $133k obligation on my credit report and banking information. Can you advise and if representation needed, what would be your fees.

        The mortgage lender states in the confirmation the investor agrees to the short sale and

        the servicer will execute a full “satisfaction and release of mortgage” upon receipt of funds as provided above and, if applicable foreclosure activity will cease. “this letter may be used as a payment demand” This transaction may have implications with your federal tax liability. You should consult the irs or your tax accountant for additional information.

        Another portion states, that i never received, a promissary note in the amount of $0, at the rate of 0%, and ther term of 0 months be executed on or before closing.

        Hence, if legal council is needed, what would be the price and the course of action.

        Thank you,

        Thomas Fogg,

        • Melissa Zavala

          Is someone trying to collect on this debt you are describing? While we are not attorneys, it does sound like the letter provides some protection and you should be okay. If someone is calling you to collect, send them a copy of the letter and tell them to move on to someone else. If you need an attorney referral, please email us at

  3. Allen Cutler

    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.

    • Bob

      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.

  4. 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.

  5. Stuart Perry

    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.

  6. 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.

    • Melissa Zavala

      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!

  7. 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 ?

  8. Alex Stein

    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?

    • Melissa Zavala

      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.

      • Alex Stein

        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.

          • Alex Stein

            Thanks, David. Appreciate the time. It will definitely be interesting to see how this works itself out.

          • Melissa Zavala

            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.

    • 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.

  9. Amanda

    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?

  10. Joe Lincoln


    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

  11. Alex Stein

    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?



    • David

      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:

      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.

  12. Amanda

    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.

    • David

      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.)

  13. 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.

      • 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

        • Melissa Zavala

          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.

  14. 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.

  15. Dalia Chacon

    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.

    • Joe Lincoln

      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

    • David

      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.


  16. 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

  17. Tim

    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!

  18. 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.

  19. marlon

    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.

  20. David

    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.


    • Melissa Zavala

      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.

  21. 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
    (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

    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.

    • marlon

      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.

  22. 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

    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.

  23. Leonora

    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?

    • Melissa Zavala

      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.

  24. Allen Cutler

    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.

  25. PNC Hater

    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?

  26. Bill Chatman

    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?

  27. David

    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.

  28. David

    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.

  29. Amber

    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?

    • Melissa Zavala

      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.

  30. Tim Rippey

    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?

    • Melissa Zavala

      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.

  31. PNC Hater

    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.

  32. Allen Cutler

    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.


    • 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.

  33. Allen Cutler


    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.


  34. SNY

    I’m in a consideration of default and then short sell my investment property in California. Besides the first mortgage loan with BofA, I also have an equity line from Citibank. The equity line was loaned after the house purchase. Is the equity line protected by SB458? If not, I heard I can ask for a written agreement from Citibank to waive the deficiency. Is this true and do you know if that’s the right way we should do? Or do we have to get the promissory note from Citibank marked with “paid in full” to make sure?
    What if Citibank doesn’t agree with short sale and I will have to put it to foreclosure, how can I make sure they won’t collect the deficiency?
    Thanks for your advice!

    • To answer your first question: yes, the junior lien (Citibank) is protected under SB5458. If they agree to a short sale in writing they may not seek a deficiency.

      If Citibank does not agree to a short sale and the house ends up being foreclosed upon, they (assuming BofA is the one that initiates the foreclosure) will be able to seek a deficiency since this is an investment property and not owner-occupied. As far as I know there is no way to ‘make sure they won’t collect.’ We are seeing some banks getting more aggressive with their deficiencies either by pursuing it themselves or selling it to a 3rd party and they sue to collect.

      As always: This is not legal advice; you are advised to consult an attorney and/or accountant for your exact situation.


      • SNY

        Thanks Dave for the information! I’d like to confirm about the definition of junior lien. Coz I thought I read some information saying the junior lien means the 2nd lender happened at the same transaction when the time I bought the property. Is this true? Does the junior lien apply to the equity line of credit also? I had the equity line loaned around 2 years after I bought the property with my first mortgage loan. Appreciate if you could help double confirm it. Also is there any website I can get a copy of exact wordings and meaning from the law SB458? Thanks a lot!

        • David

          A junior lien is any lien that comes after the first or primary lien. It could be the second, third, fourth, etc. It could be purchase money, refi, or equity line.

          I double checked with CA assoc of Realtors legal documents and their statement on SB458 is for any junior lien, for any reason, made at any time (paraphrase). SB458 has not been tested in court so as I said before, consult an attorney. But the general interpretation is what I stated.

          If you scroll up in this thread I believe someone quoted the entire 458. It really isn’t long (surprising I know for politicians not to be long winded :). You can also google CA SB458 and you should be able to find it and other commentaries as well.


  35. Noreen

    Six months ago we made an offer on a short sale and two weeks ago we finally got our offer accepted with a subsequent closing date set in 30 days. We are scheduled to close in two weeks have just found out that the seller’s second is not technically a second, instead non-purchase monies which has now been sent to collections. The collection agency is requiring 10% of the loan value before releasing the lien and allowing the short sale. Of course the seller is less then agreeable to any settlement leaving the real estate agents and us (the buyers) with the decision to pay the amount remaining after the primary lien holder’s $3000 contribution. Is this legal? Will we be culpable for any outstanding monies (such as tax liens or further collections) if we agree to this? Is there recourse for us to attempt future payback from the seller?

    • Melissa Zavala

      As long as the first lien holder knows that a contribution is being made and that contribution is on the final settlement statement, it’s legit. Essentially you would be paying money for the seller. As for as additional obligations to the loan, that would be between the seller and the lien holder.

      • Noreen

        Thank you for your prompt reply. Reflecting this additional money may be a challenge as we are utilizing a VA loan which forbids the veteran from paying additional monies. We are assuming this arrangement would be in direct violation of this clause. If so, would this preclude the agents from paying off the debt? Again, thank you for your prompt reply to our precarious dilemma.

  36. Olesya Drozdova

    I am dealing with PNC as the second and they require the brrowers to sign a clause allowing them to pursue deficiency before they review the documents for a possible short sale. Is this legal and will signing this clause waive our client’s protection offered by SB458? Thank you!

    • Disclaimer: I am not a lawyer and this sounds like the perfect case to get a lawyer familiar with SB 458 involved. With that said, my opinion is that PNC is clearly in the wrong. They are asking a person to sign away their legal rights. I do not even know if you can legally do that (either asking a person to sign away their legal rights or voluntarily sign away your legal rights.)

      The simple route is for you to contact them and inform them they are violating CA law specifically SB 458 and quote to them:

      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

      They may blow you off and in that case inform them you are retaining the services of a lawyer and they will contact PNC shortly. I would not have them sign the letter until you have spoken with a lawyer.

      Also, we have gotten elected officials involved in some cases before. Having a member of congress or assembly breathing down their throat has affected needed results as well.

    • Melissa Zavala

      Recently, our office has seen PNC using a new California-specific form. Have you already discussed your concerns with PNC? If not, that might be a good place to start. Obviously, the second would be with an attorney.

      • Olesya

        Thank you Melissa and David, I will definitely use your advice and will update you on the progress. It’s the first time we are dealing with PNC and running into an issue with the lien holder requiring a borrower to sign this clause.

  37. I’m no attorney, but per SB 458, if a junior lien holder agrees to a short sale then there is no deficiency.
    PNC knows the law in CA and the way I had to solve their demand for 20% of the note (despite the fact that the senior lien holder gave PNC $6000) was to have the buyer contribute to make the deal work.

  38. Scott

    Hello everyone! So glad to know I’m not alone!

    MY SITUATION: Short sale was in 2010 in CA. Mortgage was written off and the junior (Chase HELOC) collected a little from the purchase price to release the lien. Since then, different collection agencies have been after me for that HELOC deficiency. No judgement/suit yet. My real estate agent did NOT inform me this was going to happen during transaction but when I carefully review the papers I signed, it does mention Chase’s right to pursue deficiency. =( Chase wants to settle for a small fraction of the deficiency but that’s still A LOT for me.

    3 QUESTIONS: I consulted a lawyer and he believes since the HELOC was a purchase loan (not part of refinance), it is therefore a non-recourse loan — that I don’t need to repay. Anyone else aware of this?

    2. Didn’t my real estate guy have a fiduciary responsibility to know/ explain what was happening and not rush me thru it for his commission. He admitted later that he was mistaken and wasn’t aware that I would still owe the deficiency. If so, do I have a claim against the real estate guys so that I have some funds to pay the proposed settlement?
    –> ALLEN CUTLER, sounds like we are in similar situations? would love to stay in touch about your claim against ur real estate group.

    3. Also on different site, it does suggest that even tho SB458 is NOT retroactive, it can PREVENT your pre-2011 short sale fiasco from getting a judgement/claim against you if they haven’t gotten one yet. Anyone with info on this?


    • Greetings Scott

      I love a good question on a Saturday morning. First, disclaimers: I am not a lawyer nor a CPA and you bring up a very challenging situation. What I offer I offer as educational ideas only and must not be taken as legal or financial advice.

      So, my thoughts:

      1. A HELOC in CA can be either recourse or non-recourse. Some of the key points to determine which it is: 1) was the HELOC taken at the exact time of the original loan, 2) you never took any money out of the the HELOC beyond the original purchase, and 3) the loan was never refinanced.

      However, it is not as clear as I make it sound. Many HELOCs appear to be purchase money loans when in fact they were not. The key word I used above is ‘exact’ same time. Even though both loans were taken on the same day they could have been taken in succession. In other words, the primary loan is closed, ownership is transferred to you, and then the HELOC closes and that money is given to the seller. If this is what happened in your case then the loan is recourse. A very careful and detailed examination of the loan papers is needed by a real estate attorney very familiar with these types of loans.

      If the loan turns out to be a non-recourse loan you need to consult a CPA/lawyer to determine what avenues exist to protect you. The one additional challenge I see is that you signed a letter that allows Chase to pursue a deficiency.

      2. I cannot comment on the legalities of your agent. There are too many legalities involved for me to render any assistance on this one.

      3. As you mention, Sb458 is non-retroactive. I have never heard of any protection being offered for those that short sold before it became law in July 2011; even a protection against a future judgment. As far as I have experienced, the sale date is the key, not the date the judgment is sought. If anyone has other opinions I would be interested in hearing them.

      Best of luck to you on this challenging situation. I hope my ideas are of help to you. I must say again these cannot be taken as legal advice; just further items for you to ponder.

      • Scott

        Thanks David. The HELOC (10%) was at the same time as original loan (80%) with 10% down. Will try to find papers to examine it closely but it was all done in conjunction so it was likely a purchase loan. Never took money out and it was never refinanced. Sounds like if this is indeed the case, there may be some advantages to me there.

        Also someone mentioned that if both the original loan and HELOC is from the same bank and one of these banks listed in this settlement – – then I may be eligible for relief. Will continue to research this angle as well.


  39. MMAW

    We listed our home for short sale about a month ago. Right away we got an offer that our agent encouraged us to accept, and we did. The agent told us we most likely will not have to move out until about August because of the time the lender takes in approving the offer , etc. We have no place to go until the end of July or beginning of August, but the agent called us tonight and says that CHASE wants to have the sale completed by June 29 and us out before then. Do we have any option?The house was in foreclosure, CHASE postponed the foreclosure sale to July 9. We did qualify for the HAFA $3,000 but moving out before the end of July is a hardship. What do we do? Do we qualify for cash for keys or other funds from CHASE?

    • Melissa Zavala

      That’s a tough one. It is so difficult to predict how long it will take for a lender to approve a short sale, and it sounds like your agent did a great job. It is typical for banks to provide a 30-day escrow period (as your bank has) on the approval letter. Also, we have found that in some transactions, buyers do need extra time in order to close. Perhaps, your agent could ask Chase for a small extension. However, keep in mind that if the property goes to foreclosure, there is no guarantee that the new owner (maybe the lender and maybe a private party) will offer you cash for keys. They could also proceed directly to eviction.

  40. MCB

    First of all, my family and I currently live in the State of California. My current home value is $237K. We currently owed $364K from 1st and $124K form 2nd.
    Note: 2nd was refinanced in 2006 and cashed out $62k for home improvements. All receipts are accounted for more than $62k. No money went to personal use.
    We’ve tried getting a loan modification and was denied by the 1st mortgage(loan owned by a private investor), but was approved by the 2nd. But, after further evaluation of our current financial situation and my current medical condition (currently struggling with MS), we have decided to do a short sale instead of trying to modify. We found a realtor, realtor found a buyer for $245k and the 1st mortgage ASC processed our short sale application under the HAFA program and was immediately qualified. ASC wanted us to close by June 29, 2012. Unfortunately, the 2nd mortgage Guaranty Bank would not sign off the approval for short sale. Guaranty Bank wanted more money. Guaranty Bank was offered $6000 at first for ($124k loan), but declined verbally via phone. The short sale representative from Guaranty Bank wanted $25k. So, my realtor negotiated for more from ASC. ASC countered offer for $8500 as this will be the allowable amount they can offer under the HAFA program. My realtor then related the offer to Guaranty Bank via phone,but Guaranty Bank’s representative (Ms. C Williams) suggested that the seller(us) can make a contribution or a payment for the difference. My realtor made her aware of:
    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
    Cheryl Williams from Guaranty Bank was completely aware and still would not sign off. However, she suggested that we do a traditional short sale and meet the required $25K for the short sale to be signed off. Otherwise, she will deny the short sale and start the foreclosure proceedings. Her reasoning was 1st we can afford the current mortgage, 2nd we were denied for loan modification from ASC because our debt income ratio is < or = to 31%, 3rd that we have a savings account that has $10k that we can contribute to satisfy the loan. After speaking to her directly, I explained everything to her as follows:
    1st = We can't afford the current mortgage because ASC wasn't willing to modify to a lower interest rate or lower payments. My income declined by $55k after my 1st employer retired in 2010. My 2nd employer which is the State of California Correction decreased the hours for a PIE (per diem)employee. This basically because of the current California budget cuts. I basically, have to call everyday for shift opening to get some hours. I am also struggling with the medical condition of MS.
    2nd = I explained to her that ASC does not consider the payment to 2nd mortgage when determining the current debt income ratio into their financial worksheet. I also explained to her that there are 3 denial letters which eventually led to the "Private Investor did not wnat to approve the loan modification".
    3rd = I also explained to her that the money that we have in savings for $10k is basically a trust money that all siblings from both sides( in-law included) contibuted for any emergency that will arise to our mothers. In example, medical expenses, hospital expenses, and eventually funeral expenses. As both our mothers does not carry any type of life insurance or funeral insurance. Both our mothers are in their late 60's early 70's. We have been hit with several medical, personal, and funeral expenses with our loved ones (grandparents)that led us to have credi card debts previously. That's why the savings of $10k is for to prevent for that same situation to happen again. I even offered to provide her receipts, dates and notarized letters from all siblings from both side that contributed to the savings account but she rejected the offer.
    I know, I've written detailed information than what you need, but I just don't know what to do in this situation. My realtor requested to do a traditional short sale from ASC and we agreed. But, my concern is what if Guaranty Bank still wants us to contribute and would not take any thing less than $25k? Should we consider BK Chapter 7 or 13K, or just let them foreclose? Or should I just jump in front of the bus to satisfy their need? Please help!

    • Melissa Zavala

      I’m sorry to hear about your short sale troubles. Since we are not attorneys, it would be tough for us to advise you on bankruptcy or what steps you ought to take. What I can say is that often times a buyer may be able to come in and make a contribution to satisfy a seller lien. This might be something that your agent should consider and it seems to be in accordance with 580e. If I were you, I would seek the advice of an attorney before continuing the agony.

  41. Teresa

    Hi everyone,

    My situation is so much the same as Scott. Short sale closed on June 2010, both 1st and 2nd are Chase. 2nd got a few thousands and agreed to release the lien on the interest only. My agent did inform me of that, but she says as long as you mention that CA is an anti-deficiency state on the paper you sign, you are fine. That was 1.5 year after our house been on the short sale mark, so we sign that. Half year after we close, we started getting collection calls. I called Chase back, and they said the law only applies for foreclosure. No suit yet, but on our credit report under the Chase 2nd loan, it says charge off and “collection”. But under the collection section it is zero. Also the reporting date is almost a year after closing date. my question is:
    1. should I hire a estate lawyer to ask them to change the wording on the credit report? I owe almost 50k, and the collecting agencies have offered from 8-30k, but that is still a lot to me. And if I pay(assuming I can get this much on credit card debt), how do I make sure Chase will release my lien? Do I get a letter from Chase saying if paid this amount before certain Date, it will be solved?
    2. If I don’t pay, will it still show on my credit report after 7 years?
    3. Will I ever qualify a mortgage again within 2-3 years if I don’t pay the deficiency?

    Wish I can take this off my shoulder sooner. It’s the only flaw on my record, and I had no choice back then to short sale my house. What are my options now?



    • Melissa Zavala

      It seems as if the anti-deficiency statute was not in place when you closed your short sale. You should probably should seek the advice of an attorney.

  42. Khris

    My client received the BofA short sale approval both from 1st & 2nd lender on 08-28-12 for the California property. The 2nd approval states in its ist page “BofA will accept the amount stated ($8,500) as less than the amount due on the current 2nd mortgage and upon receipt of payment in good fundswe will release you from any further responsibility for the outstanding mortgage balance and release the lien of the 2nd mortgage”. While in its 2nd page as #3 steps states” Once we received the payment specified in this letter and the signed HUD, slong with this letter, we will release the 2nd lien and CHARGE-OFF THE REMAINING DEBT AS AN UNCOLLECTED BALANCE”. What does it mean under SB458?, can the 2nd lien run after the seller in the future? Can they sell to third party and if seller don’t pay, will be sued? Will SB458 protect the seller even with this #3 clause? Please assist. Thank you.

    • Melissa Zavala

      Khris: This is not typical for California clients. So, I would advise you to contact the closer or the negotiator and remind them that you are in California. They will likely either tell you (in writing) that this will not apply to your client because s/he is in California or issue a revised letter. Good luck.

  43. Georgette Maldonado

    my first approved the short sale but my second didnt. My shot sale is goping with the HAFA program. The second is with a credit union. We are resubmitting the forms to the forms to the second again. What if they dont appove it and the short sale does not go through, and walk away, can the second come after me?

    • Melissa Zavala

      Whether the second can come after you depends upon a lot of criteria including when you took your loan, the type of mortgage, and where you reside. Best to speak with a local attorney on that one 😉

  44. Tish

    Sooooooooo… if I had a short sale on my condo in April of 2010, so my second is still able to operate me, correct? Basically they sold the debt to a collection agency.

  45. Gerald

    SECTION 1.
    580e.(a)(1)(B)(2)(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

    Scenario: Primary lienholder (Citimortgage) is allocating $8,000 toward junior lienholder (PNC) demand. PNC is demanding $18,000. The settlement short $10,000 to satisfy PNC’s demand. Both firms are set on terms. Buyer cannot contribute due to purchase money lender restrictions. Seller can obtain private money to pay the shortage to satisfy the junior lienholder demand.

    Does SB 458 prohibit a mortgagor (borrower) from making a “voluntary” contribution (seller deposit) of funds to cover a seller shortage stated on the HUD-1?

    • Melissa Zavala

      Gerald: This has long been a topic that has stymied attorneys in California. What I can tell you is this… once in a blue moon, B of A tells us that the buyer cannot make a contribution to anything. Each and every time that we’ve been told that, we have gone to executive offices and received permission for the contribution. Hope that helps!

  46. TS Davis

    Hello and thanks for all the useful information. Maybe this is the wrong forum for this?

    I completed a SS in Cal 10/2010. After the short sale my credit got a large ding and my ‘Payment Status’ read; “legally paid in full for less than full balance”, depending on the agency. But close.

    Then I received an email from Equifax telling me that there was a change to one of my accounts. This was 07/2012. At this time I am just waiting for two years to expire so I can refinance my home (I pre-owed this house). I got a new credit report and my score had dropped 75 points overnight. The only real change was that now my account was listed with the Payment Status field reading, “120+ Days Pat Due”.

    I’ve spoken with four different representatives from BofA Escalations who all look at my merge report and see that it is in error and say that they will have a change submitted to the agencies. Problem never gets solved. Transunion sends me an email during all this saying that EFAX made a change to one of my accounts and so now they copy the error. :-(

    NOW, this new representative… we are in Escalated Escalations at BofA… is trying to tell me that they only report one thing and that is “Settled for less than full balance” and therefore saying that it is not their problem and that the agencies just choose to use that “verbiage”. BofA has told me lies before and led me on two goose chases before I called a supervisor out and then was put in touch with escalations. If what this new guy says is true, than why did BofA feel the need to initiate a change three time before?

    I nicely ‘called him out’ on this 4 days ago and he has yet to respond.

    I think I need legal counsel?

    Any Ideas? THANKS


Leave a Comment