Source: https://www.bradbrinkman.com/sellers-considering-short-saledont-worry/
Timestamp: 2019-04-24 18:43:35+00:00

Document:
Sellers Considering a Short Sale…Don’t worry!
Unfortunately, in the past, lenders were making loans in amounts that ultimately became too difficult for borrowers to repay. Some of these borrowers may not be able to fulfill their mortgage obligations. When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property–including escrow costs–is less than the loan on the property, the borrower may consider a short sale. This could save the lender the expense of foreclosure proceedings and from having another REO property on its books. From the borrower’s perspective, the short sale prevents having the foreclosure on the borrower’s credit history, and releases the borrower from an obligation that he or she can no longer afford.
In essence, a short sale is a sale transaction subject to a lender’s approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount. A short sale requires much paperwork and preparation on behalf of the borrower. Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.
A A lender may foreclose on the defaulting borrower’s real property which secures the loan. There are two types of “foreclosures” available to a lender: a trustee’s sale and a judicial foreclosure. (Bank of Italy National Trust & Savings Assoc. v. Bentley, 217 Cal. 644 (1933).) Technically, a trustee’s sale is not a “foreclosure” but the term has been used for both a trustee’s sale as well as a judicial foreclosure.
For certain loans, a lender has no choice and must conduct a trustee’s sale. With a trustee’s sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property. See Questions 3 through 5 for more details.
The lender may also be able to pursue “guarantors” of the debt who have signed written guarantee agreements (not including the borrowers).
Short Sale*: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender’s damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.
A A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. (Cal. Code Civ. Proc. § 726 (b).) A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee’s sale foreclosure, the lender cannot go after a deficiency judgment.
With a short sale, except under certain circumstances–see Question 4, the lender may demand the balance still owed on the note that the sales transaction did not cover (e.g., short sale of the property pays the lender $120,589.23 but the full amount owed on the note is $250,000). This difference may be referred to as a “deficiency balance.” It is not really a “deficiency judgment” since no court has issued such a judgment as part of a judicial foreclosure.
Q 4. Under what circumstances is the lender prohibited from going after the “deficiency balance” as defined in Question 3 after a short sale?
With the passage of SB 458, effective July 15, 2011, after the short sale of a residential property of one-to-four units, the holder of any senior or junior deed of trust cannot pursue the borrower (seller) for any deficiency under the note. If the lender consents to the short sale in writing, as long as the proceeds of sale were tendered to the lienholder as per the buyer and seller’s agreement, then no deficiency can be collected or is even owed, and no deficiency can be rendered or even requested. The borrower (seller) is protected even if the loan is refinanced as long as it’s secured by a trust deed.
An exception to SB 458 occurs if the borrower (seller) has committed fraud with respect to the sale of the property or has committed “waste” of the real property (e.g., severely damaged the property) (Cal. Code Civ. Proc. § 580e (b)). Under these circumstances, the borrower (seller) may still be liable for the deficiency balance.
Note: SB 458 doesn’t apply if the borrower (seller) is a corporation or political subdivision of the state (Cal. Code Civ. Proc. § 580e (c)).
A It depends. California has “anti-deficiency statutes” that protect certain borrowers from deficiency judgments. A trustee’s sale foreclosure does not involve the courts and does not permit the lender to go for a deficiency judgment. In order to be able to go for a deficiency judgment, the lender must use a judicial foreclosure (which involves a court proceeding).
1) Purchase Money. If the loan is obtained to purchase a residential 1-4 unit property all or part of which was intended to be owner-occupied at the time of the loan and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to “purchase money” protection. (Cal. Code Civ. Proc. § 580b.) However, should the buyer refinance the home, the new loan is no longer “purchase money.” Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.
When a deficiency judgment is not permitted, a lender would opt for a trustee’s sale foreclosure which is quicker and less expensive than a judicial foreclosure.
Q 6. Can a lender avoid the “foreclosure process” and just sue the borrower on the note (i.e., treat it as an unsecured note)?
A No. In the event of a borrower’s default, the lender has two options–a judicial foreclosure or a trustee’s sale foreclosure (either one is referred to as the “foreclosure process”). However, a lender cannot opt to sue on a note secured by a mortgage or trust deed instead of going through the foreclosure process by treating the note as an unsecured note. This restriction is referred to under the law as the “one action rule” or “one form of action rule.” (Cal. Code Civ. Proc. § 726.) A lender might prefer to sue on the note instead of foreclosing when the note is for a greater amount than the value of the property securing the note. That way, the lender can get a judgment and attach a lien against other property, personal or real, owned by the borrower. The “one form of action rule” prohibits the lender from this “third” option.
One exception to the “one form of action rule” is if the security for the loan has become “valueless” after the lender’s security interest was recorded (e.g., this would be the case for a “wiped out” junior lien holder who now holds an unsecured note). In this case, the lender can sue directly on the debt (note) unless the borrower’s loan falls into category (1) or (2) in Question 4.
A In general, as long as the property is a residential 1 to 4, then yes a seller in a short sale will be relieved of all debt obligations owed to the lender (see question 4 above).
However, for all other types of property the answer is more nuanced. Each lender is different, but some have borrowers sign a short sale agreement that releases the lien on the property without cancelling the promissory note. This allows a short sale of the property to proceed while at least potentially leaving the borrower responsible for any deficiencies on the loan. While there are no cases directly on point yet, it would appear that the anti-deficiencies statute that protects borrowers in foreclosures (Cal. Code Civ. Proc. § 580d.) do not apply when the property is sold as in a short sale.
Q 9. What language in the lender’s “approval “letter lets the seller know that the seller in a short sale is relieved of any further debt obligations owed to the lender?
Q 10. What language in the lender’s “approval “letter lets the seller know that the seller in a short sale is not relieved of any further debt obligations owed to the lender?
The amount paid to [lender] is for the release of [lender’s] security interest only, and the borrower/seller is still responsible for all deficiency balances remaining on the loan, per the terms of the original loan documents.
Note: Do not rely on verbal assurances from a lender’s representative that this is just “boilerplate” language and doesn’t mean anything.
Q 11. So what have lenders been doing if their “approval” letter does not relieve the seller of any further debt obligations?
Q 12. Does a short sale adversely affect a defaulting borrower’s credit rating?
Q 13. Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower’s credit report?
A Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower’s credit report as a “foreclosure in process,” “foreclosure proceedings,” “current was 30,” or in some other way. Any such terms, or other similar reporting comments, harm that individual’s overall credit rating.
A Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower’s best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
To check someone’s license status with the DRE, go to its Web site athttp://www2.dre.ca.gov/PublicASP/pplinfo.asp.
Certain exemptions to the licensing laws may apply. For example, a real estate license is not required if someone merely performs clerical or administrative services, such as assembling a short sale package as long as final determination as to its completeness is made by the broker (see 10 Cal. Code of Reg. § 2841 which lists other permissible clerical activities). For other exemptions to the licensing laws, see C.A.R.’s Legal Q&As, Licensing Guide for REALTORS®,Licensing Chart for REALTORS®, and Unlicensed Assistants.
A Yes, if the property being sold is a residential 1-4 unit dwelling and the transaction doesn’t fall into one of the regular TDS exemption categories. No exemption exists for a short sale transaction in which the borrower sells the property to an outside buyer, using the sale proceeds to pay off the lender. See the C.A.R. legal article, Exemptions from the Transfer Disclosure Statement (TDS and MHTDS) Law, for a list of all the exemptions from the TDS requirement.
In addition, recent federal law known as the Mortgage Assistance Relief Services (MARS) rules impacts short sales potentially requiring certain additional disclosures. See, in particular, Questions 11, 12, 13, and 15 of the Legal Q&A,MARS Rules for Short Sales regarding the applicability of the MARS rules to short sales and see Section III for the disclosure requirements.
A Probably. Although the lender is technically not a party to the real estate contract, lender approval is nearly always a contingency of the agreement. Therefore, REALTORS® should obtain the client’s permission to keep the lender apprised of any relevant developments, including the presentation of other offers.
A No. Listing agents working with distressed sellers owe them a fiduciary duty. Since in a short sale situation a lender could choose to foreclose on the seller, the lender’s interests are potentially adverse to the seller’s interests. Attempting to negotiate a future listing agreement with the lender raises the issues of “to whom is the agent’s loyalty devoted” and “has the agent violated the fiduciary duty he/she owes the seller.” The safer practice is to avoid putting oneself in such a position.
· Fourth, the lender will send out their own appraiser to make sure that the buyer’s offer is at fair market value.
Q 27. Where can I obtain additional information?
A You may consult the seller’s lender directly about their policies and what is required to apply for a short sale of a property. The internal departments that handle short sales differ by lender. You may try asking for the problem loan department, loan workout department, loss mitigation department, or foreclosure department.
See also all the other short sale legal articles that can be found under the Foreclosures and Short Sales category of the Legal Articles (By Category)page.
This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit car.org.

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