In California, it is official: lenders who agree to short sales must accept the diminished payment as “payment in full for all loan balances.” This means that junior lien –holders cannot sue sellers after the fact for the full balance of the loan[1]. Governor Jerry Brown of California recently signed SB 458, the bill dealing with this issue, into law to the great delight of the California Associations of Realtors (CAR), who believe that this will make short sales far more attractive to many homeowners. “SB 458 brings closure and certainty to the short sale process,” explains CAR president Beth Pierce.
However, not everyone is as optimistic as CAR about this bill. Real estate brokers like James Harvey fear that SB 458 will simply make it more profitable for banks to foreclose than negotiate short sales[2]. He writes: “The banks have been complaining about the cost of having to do short sales over [foreclosures].” He fears that now lenders who hold junior liens will simply deny short sales, thereby necessitating the first lender to foreclose on the home and leaving the second lender free to pursue a deficiency judgment against the homeowner.
Do you think that this is likely to be a problem on a large scale, or is SB 458 a good idea that will help lots of homeowners move on from their housing troubles?
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[1] http://rismedia.com/2011-07-25/california-realtors%C2%AE-applaud-new-law-on-short-sales/
[2] http://www.ocregister.com/articles/short-310751-law-new.html
Again, unintended consequences. Government should not be interfering in civil contracts. If it was a legal contract, government has no business trying to change it afterward. That is tantamount to condemning land and eminent domain. If government is going to make it worthless for “the good of all” then it should pay for that value. If it doesn’t want to pay (and it should not!) then it should keep out of the fight.
Not only will this open the door for seconds to refuse to agree to shorts, it will kill the second mortgage market entirely for all practical purposes. No more seller seconds, no more HELOCS. We see fewer of these anyway, but why add more reason to eliminate them?
One more thing, the first lien holders should have no bully strength to force short sale buyers to hold a property for longer terms. That only increases the cost for the ultimate buyer. Only a naive fool is going to believe or insist that all short sale buyers be owner occupants. No way will that happen. The process is too drawn out and too precarious for most owner occupants to risk even the appraisal funds on a loan that may be denied because of the very short sale process that is supposed to get them a bargain.
Banks got their just desserts. Now get out of the way.