Good news for California former homeowners caught short and forced to sell homes for less than the amount of their mortgage during the great Recession beginning in 2008.
Property owners who sold for less than the bank was owed in what’s known as a “short sale,” the lender cannot turn around and seek to recover the difference from the borrowers, the California Supreme Court ruled Thursday.
During the mortgage crisis beginning in 2008, homeowners all across California found home values dropping and mortgages coming due that they could not pay or refinance. Many where forced to resort to “short sales,” that is selling the home for less than what is owed on the outstanding mortgage and turning the proceeds over to the bank. In some cases, lenders sought what’s known as a “deficiency judgment” in order to recover the remainder of the loan owed by the borrower.
California has long held that in foreclosures, when a bank takes over the house, banks are not entitled to deficiency judgments. But the question remained open about whether a bank could seek recovery in a short sale.
State law “applies to short sales just as it does to foreclosure sales,” the court ruled unanimously in the case of a San Diego woman who sold her condo in 2010.
Banks cannot try to recover the difference between the short sale price and the remainder of the borrower’s debt in short sales.
In 2004, Carol Coker bought a San Diego condominium for $400,000. By 2010 she had fallen behind and asked her lender, JP Morgan Chase Bank, if it would release its interest if she could sell the condo for $400,000.
Chase agreed if she would remit all proceeds to them and later said it expected $375,000, once closing costs were deducted. Coker sold the condo for $400,000 and paid Chase, but in January 2011 the bank demanded $116,700, the balance remaining on her loan.
As the mortgage crisis gathered steam, the number of short sales skyrocketed. In 2009, 160,000 short sales occurred nationally, up from 96,000 in 2008, the LA Times reported in 2010. One quarter of those were in California, with another quarter split among Arizona, Texas and Florida.
Case: Coker v. JP Morgan Chase, S213137