Short sales (when the sale amount is less than the balance owed on the property’s loan) have become a popular option to avoid foreclosure proceedings, especially for home sellers in California. While it was thought to have a better credit outcome for the borrower, short sales in California have NOT been protected from lenders pursuing the original borrowers for the remaining loan balance – until now.

The California Senate has passed Senate Bill 931, without opposition. SB 931 prevents banks from pursuing sellers on ALL first mortgages, including short sale sellers. The bill protects sellers on all first liens, even if the seller has refinanced the loan or taken cash out. This basically nullifies California’s “recourse loan” statutes on short sales.

SB 931 has been passed to Governor Arnold Schwarzenegger’s desk for signature. It prohibits deficiency judgments on properties of 1 to 4 dwelling units, non owner or owner occupied. While some sellers have been able to get lender settlements without recourse, this bill eliminates the need to engage costly attorneys or mediators to make those negotiations.

SB 931 was sponsored by Denise Ducheny, a San Diego Democrat. The implications are huge – many sellers have been reluctant to go through with short sales, which are also time-consuming and complex, because they fear the recourse. With recourse out of the picture, both Realtors who specialize in short sales and their clients have reason to celebrate.

Since the bill went through unopposed, there is no reason to believe that the Governor will not sign 931.  Will other states follow?