As of July 15th, 2011, the new Short Sale Deficiency Law became effective. This applies to second mortgages involved in a short sale.
If the first lender agrees to a short sale then the agreed-to settlement is Payment in Full (since Jan 1, 2011). What about the second? This new law SB458 now says that any second or junior lender who agrees to a short sale is now prohibited from going after a deficiency judgment against the homeowner. Now there is also no recourse on second mortgages in CA.
I am sure this law will help many. What immediately comes to mind is the fact that second lien holders that have substantial losses may now decide NOT to cooperate with short sales. Anthony B Sanders, Professor of Finance at George Mason, has posted just that concern. This law may backfire, Sanders says, by making second lien holders less likely to agree to short sales. In the past if a second lien holder refused to settle for the normal 3 to 5% then at least there was the option of settling with a reduced note. That will no longer be allowed.
Considering that most second notes are small and the current values of the homes are far less than the first mortgages, this law will be welcomed by many borrowers.
By the way, if your home is foreclosed upon (non-judicially), and the first and second mortgages are purchase money loans (a home-financing technique in which buyer borrows from the seller instead of, or in addition to, a bank), then the banks have no recourse against the California borrower.
Always check with your accountant and real estate attorney before making important decisions about your home. Realtors may not practice law or accounting.