Great news for struggling homeowners in California. Effective January 1, 2011, California law (Code of Civil Procedure § 580e) prohibits a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of not more than 4 units in any short sale. The lender must consent to the short sale in writing in order for the prohibition to take effect. If the lender does consent in writing to the short sale, the sale obligates the lender to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.
The law seems very fair to me…both the borrower and the lender took risks that home prices would depreciate in value, and both are consenting to essentially cut their losses by virtue of the short sale. There’s no reason the borrower should bear any more of the loss than the lender.