Effective January 1, 2011, the holder of a first trust deed secured by 1-4 family residential dwelling units may not obtain a deficiency judgment for the unpaid balance of the note after the lender accepts a "short payoff" or "short sale," i.e. less than the full payoff in the sale of the property to a third party. While this does not specifically state that a lender may not demand a separate unsecured note as a condition for approving the short sale and does not state that the provision is not waive-able by the debtor after a default has occurred, I would fully expect that a court would not allow a lender to successfully impose such a condition. This adds to the California maze of anti-deficiency/one action rules when it comes to the rights and remedies of real property secured lenders in California. If you have any questions as to how these laws affect a particular loan, please feel free to contact me. As with all the tinkering done by the legislature in the area of foreclosures, it is an open question as to whether this will help or hurt the situation. The lender may be left with the choice of accept or reject a short payoff as payment in full even when the borrower would like to offer an unsecured note.
Cal Code Civ Proc § 580e (2010)
§ 580e. Deficiency under note secured by first deed of trust or first motgage; Sale for less that remaining amount of indebtedness due; Written consent of holder of first deed of trust or first mortgage as obligation; Fraud
(a) 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.
(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.
Added Stats 2010 ch 701 § 1 (SB 931), effective January 1, 2011.
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