Legal Question in Real Estate Law in California

Not even close. All SB931 does is clarify an ambiguity in the existing purchase-money anti-deficiency law that cropped up in short sales. Existing law requires lenders to file a foreclosure lawsuit, rather than use a private trustee's sale foreclosure, if they want to preserve the right to recover any deficiency after the property is sold. Existing law also provides that when a lender makes a loan for the purchase of the borrower's personal residence, at the time of purchase and applied 100% to the purchase, the lender cannot seek recovery of a deficiency regardless of whether they foreclose by trustee sale or court sale. With the explosion of short sales, some lenders, most notably and agressively Bank of America, have been contending that once they approve the short sale and release their mortgage, they are unsecured lenders and the puchase money law does not apply. Their theory, and it is not a bad one, is that the short sale approval is such a substantial loan modification (secured to unsecured) that it takes the loan out of the scope of the anti-deficiency statute. I know of no case where they have tested this theory, but their short sale approval letters are reported to have very agressive language to this effect. Eventually an appellate court test case would have been needed to resolve the issue, perhaps even several if opinions differed, which would then require a Supreme Court case to resolve it. So the legislature short-cut that process by SB931 which provides that original purchase-money anti-deficiency law applies to the loan regardless of whether the lender gives up their security in a short sale. I am sure, however, that BofA lawyers are hard at work right now drafting up provisions that will require borrowers who are applying for short sales to agree that the entire loan is repaid with the proceeds of the short sale, and then sign a new note for a new loan for the balance owed. And if that doesn't work, you'll probably see lenders just stop approving short sales on purchase-money mortgages.

No, its just the Legislature's response to short sales of residential property. It adds a new code section, Code of Civil Procedure section 580e.

It would prohibit a lender under a first deed of trust on any residential property of 4 units of less from suing for a deficiency after agreeing to a short sale. It does not specify that it applies only to purchase money mortgages as claimed by Mr. McCormick, but rather all notes secured by a first deed of trust or a first mortgage for a dwelling of no more than 4 units.

This means it would not apply to purchase money loans or seller financed loans on raw land, or commercial property, which would still leave the issue open to court interpretation whether section 580b prevents a judgment for a deficiency after a short sale in those specific instances.