Short Sale Deterrent Eliminated by California Law

The California Association of Realtors declared victory in getting a bill signed into law that prohibits junior lien holders from pursuing a deficiency judgment on short sales.

For some homeowners the prospect of a deficiency judgment hanging over their heads was a deterrent to giving up their homes through a short sale or strategic default.

Gov. Jerry Brown signed the bill, sponsored by state Senate Majority Leader Ellen Corbett, D-San Leandro, into law last week. The law limits any lien holder from going after borrowers if the sale of a home does not satisfy the entire mortgage balance.

It is unclear whether the new law will be a thorn in the side of major California lenders such as Bank of America, which inherited and has written down a sizable amount of the impaired home equity portfolio of Countrywide Financial Corp.

Deficiency judgments in residential foreclosures are rare. Most foreclosures in California occur under a deed of trust (not a judicial foreclosure), in which there is no liability for a deficiency.

Still, Beth Peerce, president of the California realtor group called the law "a victory for California homeowners," many of whom were forced into a short sale only to find the lender would "demand an additional payment to subsidize the difference."