Senate Bill 458 Having Negative Consequences

The consequences of Senate Bill 458 are hitting the real estate market in a very bad way.

To all our beloved readers out there, we hate to say “we told you so”, but we’re doing it – we told you so!

If you read our previous article on the Senate Bill 458 you may have noticed that we made some predictions there.  We would now like to take the opportunity to let you know that we are seeing our predications come to fruition.

In case you don’t know, Senate Bill 458 was enacted on July 15, 2011.  The bill prohibits deficiency judgments for second mortgages (aka junior liens or second liens) after a short sale closes.  A deficiency judgment is a judgment against a borrower whose mortgage foreclosure sale did not produce ample funds to pay the underlying promissory note, or loan, in full.

The intent behind SB 458 was to provide relief for homeowners.  The relief was that once a homeowner short sold their home they would not have to worry about deficiency judgments – being responsible for any difference between what was owed and what the home sold for.  The agreed sale price for the short sale would be considered “payment in full”.

JohnHart predicted that even though on the surface the senate bill seemed helpful and positive for homeowners that there would be negative side effects on short sales.  Not even a month into it and we are seeing the consequences, and they are not good.

The homeowner only sees the benefit of SB 458 IF the short sale happens.  Did anyone stop to ask, “Will lenders flat out refuse to participate in a short sale?”  The answer is yes, in case you’re wondering.

The bill has been enacted for less than a month and we are already facing lenders refusing to participate in short sales.  This outcome should have been pretty obvious if you stop and think about it.  If you were the second lien holder why would you agree to a short sale instead of a foreclosure giving you the option of suing the homeowner for the full amount?  Exactly.

JohnHart predicted a possible scenario in our previous article that there was the possibility of an increase in contributions.  This meant that lenders would require a higher payment upfront before they will approve a short sale.  This causes the sale price of the home to go up thus making it harder to sell.

These likely scenarios are no longer predictions and are now fact.

In such little time we are seeing lenders all together refusing short sales.  Other lenders reporting to us that they are having their negotiators take short sales that were already approved and “reevaluate” them.  Does that mean homeowners will soon be getting denial letters for a short sale after they have already been approved by their lender?

We also have encountered lenders who are in complete denial that a Senate Bill 458 was even passed!  They are under the impression that they can still go forward with a deficiency judgment against homeowners!

A lender, who we won’t mention by name, is going as far as requiring 20% of the unpaid principal balance to issue short sale approval.

The obvious question here is, how is this helping homeowners?

About John Maseredjian

John is the Vice President here at JohnHart, and as such is responsible for managing and directing the firm towards obtaining its ultimate goals. He is also one of our main contributors on the Blog. (please see his profile page on the main site for more information.)

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