Devon Li

Sure your Realtor can help you short sale your house, but what about the deficiency judgment? San Francisco Short Sale Expert, Certified Distressed Property Expert, Devon Li 415-518-3554

A friend contacts me recently, crying for help of a collection bill she received. She and her husband short sale their home last year thru another realtor. Their lender approved the short sale and the transaction went smoothly. But one year later, the collection bill shows up in their mailbox. Their previous lender Chase, is pursuing a balance of $170,000. What is happening here?

After much detail conversation with her, I figured what went wrong. Their realtor never explained to them the deficiency judgment, one of the big consequences of short sale. WAIT! Isn't that California a State with the anti-deficiency protection law? Well, in her case, NO.

Let's take a look at their scenario:

• In 2003, they bought the house for $486,000 with a loan at $400,000.
• In 2005, the house value had gone up, so they took out a HELOC-Home Equity Line of Credit for $125,000 for home improvement.
• In 2007, they did a refinance and their total loan amount was roughly $525,000.
• In 2009, the husband lost his job and their income cut in half. They tried to modify the loan but got denial.
• In 2010, their Realtor short sale the house for $355,000.
• In 2011, their previous lender pursues the outstanding balance of $170,000.

The reason they receive the collection bill from their lender is because they turned their non-recourse loan into a recourse loan by refinance in 2007. When they purchase the home and take out a loan, that is a purchase loan, which is a non-recourse loan. The bank or the lender has no recourse for the homeowner personally if the homeowner fails to make the monthly payment. After the refinance, the non-recourse loan became a recourse loan, and their lender now has the right to pursue for their assets and collect the outstanding balance. This can be avoided if their realtor has knowledge about this and explained to them the deficiency consequences before short sale the house. Also, the realtor should review the final short sale approval before close escrow with the homeowners to make sure there is no deficiency judgment. In this case, they didn't. Awww, I felt bad for her and her family as they don't really have any options other than file bankruptcy.

The good news is, California homeowners do have the protection against deficiency judgment under the Senator Bill 931 (SB931). This bill is passed and signed on September 30th, 2010 and take effects on January 1st, 2011. THIS BILL ONLY APPLIES TO ANY FIRST MORTGAGES FOR A DWELLING OF 4 UNITS OR LESS. If a homeowner has a second or third lien, they should negotiate to get this deficiency rights to be waived.

(The information in this blog post is for informational purpse only. Please consult an attorney and tax advisor regarding your situation BEFORE you consider a short sale, deed-in-lieu of foreclosure or foreclosure.)

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Devon Li / KK&C Realty / DRE# 01767675

415-518-3554

www.ichoseshortsale.com