Among SB 931′s exclusions are deficiencies arising from the short sale of raw land.  SB 931 protects borrowers from deficiencies of a first deed of trust where the lender consents to a short sale of the property, but the property must be improved by one to four dwellings.  Single-family residences, duplexes, triplexes are included.  Raw land is not. 

For the borrower who owns title to a parcel that is now underwater, a short sale does not gain the protection of SB 931 (soon to be California Code of Civil Procedure Section 580e).

The bill, which will add a new section to the Code of Civil Procedure, Section 580e, is designed to provide relief to homeowners who are underwater on their first deed of trust but are uneasy about short selling their home since the lender is threatening to pursue a deficiency judgment for the remainder due on that first.

SB931 adds language which essentially says that a lender who consents to a short sale waives any right to pursue a deficiency on a first deed of trust for that property.  It does not apply to second deeds of trust, but its language clearly includes all types of first deeds, even those resulting from a refinance. Doesn’t include deeds that were obtained through fraud or false pretenses.

What does this do for the industry as a whole?  It provides certainty.  Certainty about one more problem that homeowners, borrowers, and real estate brokers face.  The more we replace confusion with certainty in this market, the closer we get to moving forward. 

Here is the text of the bill.

There are a few restrictions under the main anti-deficiency law. First, the home which the loan is secured against must be a primary residence of the borrower, meaning the residence which the borrower purchased as his or her primary home. In other words, funds used to purchase vacation homes, rental homes, or other investments, are not available for this protection. Second, the funds from the loan must be characterized as ?purchase money?, meaning the funds went directly to purchasing the home, or in few cases, improving the home. Third, the home must not be part of a dwelling which has more than 1-4 units.

California Code of Civil Procedure Section 580b is the anti-deficiency statute which pertains to purchase money loans. This section states in part:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

This type of loan is known as a ?non-recourse loan?, meaning the only recourse the lender has for the payback of the loan is against the property.

The anti-deficiency protection under Section 580b is available to the borrower whether the property is lost through a foreclosure or a deed in lieu of foreclosure, or transferred to a third party through a short sale.

Civil Code Section 580d is an anti-deficiency statute which protects many other borrowers where the lender proceeds to foreclose on the property and does so through a private, trustee sale, as opposed to a judicial foreclosure. For instance, where a borrower has a second loan on the property, commonly known as a HELOC (Home Equity Line of Credit), Section 580d may provide protection from a deficiency. In a private sale, the lender is enforcing a power of sale clause contained in the deed of trust. A judicial foreclosure process allows a lender to obtain a deficiency judgment against the borrower for non-purchase money loans. This route is much more expensive and takes much longer than a private, trustee sale.

I’m not sure if there is any real extra benefit to a Realtor involved in a transaction. One interesting aspect of Fannie Mae’s HAFA is what is known as the D4L, a program where the borrower can reach an agreement with the lender to remain in the home after the short sale or deed in lieu transfer is completed.  This would ease the burden of the short sale or foreclosure, and also give the borrower an opportunity to remain permanently in the home if he or she can find a way to purchase the home back while in righful possession.

I don’t see how the DILF (deed in lieu of foreclosure) program does much for the Realtors, but as soon as I understand the guidelines better, I’ll provide my take.  Hopefully, it truly streamlines the short sale process!For now, it looks like in borrowers who are looking at a short sale or DILF in California or elsewhere, will be slightly better off if this program works out.

One more point, even where the lender will accept a deed in lieu of foreclosure, the lender should be aware of any second deeds of trust.  Remember, a deed in lieu of foreclosure, unlike a traditional foreclosure, does not wipe out seconds.

We all know that there are certain valid defenses against lenders.  Many of them, if true and if properly presented, can and will actually stop a foreclosure.  The difference between the presentation of a good defense to a court and the hurling of a sloppy argument-making a sure you hire a real estate attorney that is actually licensed and actually knows what she or he is doing, or hire a licensed Realtor that understands foreclosures.  If the person calls himself or herself a Loss Mitigation Specialist, I would be very concerned.  Not a good trend.

Likewise, if two (or more) potential beneficiaries disagree about what they should do with their real estate, a partition action under the California Probate Code is usually the best solution.  Probate Code Section 11950 is the governing section, and the subsequent sections address the procedure.  If the beneficiaries own undivided interests, for example, a single-family home on a parcel, then the court will usually grant the partition and order it sold, either on the market or to one of the beneficiaries if they requested this and were able to convince the court that they should be able to purchase it.  If the property is divisible, such as a parcel that could be split into two lots, then the court’s order may contain a direction to split the property and allow each party to take their fair share, and do what they want with it.

Though it sounds rather simple here, a partition can often become a rather complicated process.  Appraisers may be needed to testify as to the value of the property.  Perhaps a real estate broker or two will be asked to testify as to the marketability of the property.  Accountants will be necessary if there is a dispute regarding the accounting of the property’s income and expenses.  And of course, each side has attorneys making their case before the court. 

Do I recommend partitions? Yes.  But only where the beneficiaries or current property owners simply cannot find a solution that involves keeping the property or selling it informally.  If the twe sides can sit down and develop a plan that works out for everyone in some regard, the partition action can be avoided.

One more thing about a partition in probate.  The court’s order only affects the interests in the property that are subject to the probate administration, unless other owners or would-be owners agree and consent to the court’s jurisdiction over their interests.

Once a probate is opened, the court will appoint a probate referee, usually a highly-regarded lawyer or someone with credibility which the court has pre-approved.  The referee will make a determination of the value of real estate, or other propery, at the time of death.  That determination, unless not accepted by the court, will be relied upon by not only the personal representative and the court, but all other interested persons in the probate estate. 

As a personal representative, you will still need to conduct appraisals on the other property (not real estate) owned by the decedent, such as personal property that is not unique.  For unique items, such as art or jewelry, sometimes an expert in that area needs to be retained to make that appraisal.