California Gov. Arnold Schwarzenegger signed a state bill into law Oct. 1 prohibiting mortgage holders from pursuing deficiencies after a short sale is accepted. This new law gives homeowners deficiency protection after short sale
Before S.B. 931 was signed, distressed borrowers who sold their homes for less than the owed amount were still in danger of owing the debt left over, or the deficiency. Many lenders routinely granted deficiency waivers, but now it is required by law.
California pre-foreclosure sales, often short sales, increased 8% in the second quarter, according to RealtyTrac, which tracks the data.
Schwarzenegger vetoed a broader bill. S.B. 1178 would have retroactively extended anti-deficiency protection to borrowers who refinanced. Schwarzenegger said signing the bill would have fundamentally altered and impaired the nature of previously negotiated mortgage loan contracts.
He added that the bill would have encouraged borrowers to strategically default.
“Fundamentally altering the nature of a contract after its consummation is a bad precedent and will provide uncertainty for future lending transactions,” Schwarzenegger said.