Normally I don’t publish press releases, but this one is important – and has some consequences that I think should be mentioned lest weary, distressed home owners think that they are now out of the woods with short sales in California.
First, though, the press release from the California Association of Realtors (a trade group to which I belong). Afterward, I’ll mention (some of) the negative impact and discuss why I see short sale lawsuits looming on the horizon in Silicon Valley and why this change may add one more reason for litigation.
CALIFORNIA ASSOCIATION OF REALTORS® applauds Gov. Brown on signing SB 458 into law
LOS ANGELES (July 15) – The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds Gov. Jerry Brown on signing SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.
“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
SB 458 contains an urgency clause making it effective upon signing.
Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with nearly 160,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.
This all sounds pretty good – home sellers who are given a short sale will not have to look over their shoulders for debt collectors and lawsuits over deficiency judgements later as banks try to recoup their losses. There are many plusses, and CAR is generally correct in applauding the signing of this new bill.
BUT there’s a downside. The most evident negative is that if the holders of 2nd liens cannot force the homeowner to cough up money (assuming they have it, which some do) for the short sale, these lenders will likely feel inclined to not play along with the short sale and force a foreclosure instead. After the foreclosure, they may be able to sue for damages and come after the seller later – who knows how many years later, if they determine it’s worth waiting for.
And, of course, this is all the more likely if there’s silent mortgage insurance on the home (placed by the lender, unbeknownst to the home owner).
What will this do to the short sale inventory? I suspect it will cause more delays and wrangling behind the scenes, slowing down the sale of short sale listings in Santa Clara County and throughout the state. There may be word games – sellers aren’t forced to pay but if they volunteer, well, then the deal will go through. Just semantics, right?
Short sale lawsuits are coming
Later, the short sale lawsuits will follow. Some are in process now. Already many lenders, real estate agents and home sellers are laying the groundwork for years and years of short sale litigation ahead. Most of it comes down to falsifying information (fraud) or negligence. There’s enough blame to go around and we’ll find sellers (home owners), real estate agents, lenders, loan officers and others getting dragged into court over some stupid mistakes and calculated lies.
I predict that we will see court action over all of these issues:
- seller fraud regarding hardship (fudging their true status or creating a hardship in order to qualify)
- fraud – some sellers conceal assets to get the short sale, and banks may well find out about it later
- fraud lawsuits against sellers who never should have gotten loans in the first place since they falsified loan documents (and this may be discovered in the future)
- consumers suing banks over abuse of their own due process
- lawsuits about the missing notes (already happening) and the requirement to have the note in order to foreclose
- suits over improper foreclosure proceedings, improper evictions, etc.
- agents will be sued for promising to help get a loan mod, and not really following through in hopes of getting the short sale listing when the loan modification doesn’t come through (are we asking the fox to guard the henhouse here?)
- brokerages will be sued for some of the short sale mills created under their name – agents who build a huge business of short sales but allow some important, crucial details to fall through the cracks – sellers who lose to foreclosure will later sue for lack of due diligence and failure to perform as a good agent
- investors may sue their credit unions for avoidable losses in bungling short sales and allowing properties to go back to them as REOs, suffering huge losses later
- banks will be sued for pushing too many short sales onto too few a supply of real estate professionals (I heard tell that one bank gave ONE Realtor 200 listings to handle) – these agents can’t do a good job for so many listings and consequently expensive mistakes are being made
- too many real estate agents are overly confident in giving “simple answers” to complex problems and failing to strongly recommend that their clients discuss their situation with legal and tax professionals – this may be the biggest mistake being made generally
- this new short sale law may cause 2nd lien holders to play games with words, suggesting that sellers can “volunteer” to pay – and those sellers will surely later sell for the duress
Tread carefully in this arena of short sales. If you are underwater on your house and need to get out, talk with a real estate agent who’s ethical and seasoned, a real estate attorney AND a tax professional. It is imperative that you do this so that you don’t become mired in lawsuits later. They are surely coming.