A Ray of Light for (Some) California Short Sellers

January 26, 2016

house floating in rescue ringThe California Supreme Court gave a gift to borrowers who sold their homes in short sale transactions before California statutes were amended in 2010 to apply anti-deficiency protection to them. Coker v. JPMorgan Chase Bank, NA (2016 WL 240901, January 21, 2016) applies California’s “one action” rule to short sales. A borrower who short-sold a home financed with a purchase money mortgage cannot waive anti-deficiency protection as a condition of the lender’s approval of the short sale.

California law prevents a lender from collecting a deficiency from a borrower after foreclosure of a home bought with a purchase money loan. If the sale doesn’t produce enough to repay the loan, the lender takes the loss. But in a short sale, the lender doesn’t foreclose. Rather, it releases its mortgage so the borrower can sell to a third party, and the seller gives the bank all the proceeds.

Residential Mortgage LendingCarol Coker bought a condominium in San Diego County with a $452,000 purchase money mortgage in 2004. She defaulted and received a foreclosure notice in 2010. Coker asked the lender to release the mortgage so she could sell the condo to a private party for $400,000; the lender agreed — but with the condition that Coker would be responsible for any deficiency balance remaining on her loan. Coker accepted this condition. After the sale, the lender claimed a $116,686 deficiency.

The anti-deficiency law (Cal. C.C.P. § 580b) didn’t address short sales when Coker sold her condo, perhaps because they were uncommon before the financial crisis. But the Coker decision reports there were 90,000 short sales in 2009 and about 110,000 in 2010. (The anti-deficiency law was extended to short sales in 2010, see Cal. C.C.P. § 580e.)

The lender argued that because a short sale is not an involuntary sale, the anti-deficiency law didn’t apply. The California Court took a more consumer-friendly approach, holding that it applies to all sales of property bought with a purchase money mortgage. It cited “more than half a century” of precedent amounting to an understanding that a lender’s recovery on a purchase money mortgage is limited to the value of the security, no matter how the security has been exhausted.

The bow on the court’s gift to borrowers with pre-2011 loans is that anti-deficiency protection cannot be waived. Coker, remember, agreed to be responsible for the unsatisfied balance on her loan after the short sale. The California Supreme Court refused to enforce that waiver.

Titles by Andrea Lee Negroni