: Law against short sale deficiencies expanded to Junior Liens

I know most of you are aware of the great news in regards to the expansion of the deficiency law to junior lien holders. There is no doubt this is a huge improvement that will make negotiating with seconds much easier and much more successful. However, there have been some misunderstandings on these new rules and I wanted to clarify a few things so that moving forward you are able to set proper expectations with your clients.





SB-458



1. As of 7/15/2011 Senate Bill 458, prohibiting a deficiency after a short sale for one-to-four residential units, regardless of whether the lender is a senior or JUNIOR LIEN holder.





2. Effectively immediately on all transactions closing escrow.





3. A lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval.





4. The law does state that this does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale.





5. A lender is 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.





When we receive great news like this it is easy to overlook some key points or not read between the lines and think it through. I have had several calls on items 2-5 so here are the Q&A in order:



Q. If my client completed a previous short sale or the home was foreclosed on does this law apply?



A. No, this law only applies to transactions in escrow from the date the bill was passed and all new short sales moving forward.







Q. Since the lender is no longer able to require a borrower to pay additional compensation in exchange for a short sale approval, does the lender have the right to reject the short sale?



A. Look at numbers 3 and 4. In number 4 it states that the law does NOT PROHIBIT a borrower from voluntarily offering a contribution in HOPES of obtaining a short sale. How I interpret this is the lender can reject the short sale in order to see if they can obtain a contribution where the hardship is not strong and the homeowner does not offer anything in good faith.



We still need to make sure our clients are true candidates for a short sale. If the homeowner clearly shows in his financials that he has money to contribute and it is therefore not a traditional hardship you will want to have an upfront conversation with the homeowner to lay the groundwork. The lender may or may not accept your short sale so a contribution may be in your client’s best interest.



If the homeowner can clearly show in their financials there is nothing to give they have a better shot at getting it approved. There are no guarantees so the best you can do is pre-qualify all clients and set proper expectations.







Q. Does this mean that the lender will no longer expect other parties to contribute?



A. This is one that really needs to be read all the way through. The lender can still ask for a contribution from agents and possibly relatives. Wells Fargo seconds almost always do this. Again, I would make sure that you set proper expectations with your clients in regards to voluntarily contributing depending on their circumstances to minimize your risk of coming out of pocket.



First lien holders are getting better at contributing 10% to the seconds but it is hard to say what their number will be until we get the approval in hand. Remember when they would only contribute 6%. Well I can tell you from experience that seconds are getting smarter and tougher and that they will try to pull dollars from as many places as possible to squeeze as much as they can. Remember that they are taking the biggest loss.



We still need to do our due diligence in the beginning to have a smooth closing in the end.







Please join # 1 Real Estate Attorney “ David Bright” and myself on 7/28/2011, at the Tamarack Beach Resort between 11am and 1pm for an educational event. We will be discussing important topics in the short sale market including this new senate bill, Equator and MARS rules. Please RSVP as there is limited seating at 858-764-7300 or email Lana@lotusrealtygroup.com.



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