Effective January 1, 2011 in the state of California, Governor Schwarzenegger recently signed into law the new 580e which states in part: “No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.”
What this new law appears to mean is this: if you complete your short sale on your residential property, there will be no deficiency obligation on the first mortgage. Unlike the existing Section 580b which only protects borrowers with “purchase money loans” on their primary residence, the new 580e catches all first loans on all residential properties regardless of whether they have been refinanced or not. While there are some ambiguities, the statute states that there will be no deficiency for any note secured by a first deed of trust or first mortgage.
While this is good news with respect to first mortgages, the statute has no effect on liability regarding junior loans (seconds, thirds, HELOCs, etc). Sellers will still need to work with and negotiate with their lenders on obtaining a release of liability from the juniors. However, this is a huge step for homeowners as the first trust deed has always been the bulk of their worries.
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