During the next few months, short sales will sky rocket. Short Sales are sales of upside down houses for the market value. To make the short sale work the first and second mortgage holders must write down the loans to equal the true market value of the house. Since the first has first call on the funds, the second write down a much large percentage of its loan, often 80-90%. Seconds have been resistant to do so, in hopes that the First would foreclose because under current law, if the First forecloses and makes the Second worthless, the Second the right waive the deed of trust and sue on the note- for the full amount of the second loan.

However, under an amendment of CA Code of Civil Procedure 580, the second cannot get a deficiency judgment in any event on any loan, refinance, or other credit transaction that is used to refinance a purchase money loan, as defined, or subsequent refinances of a purchase money loan.

The law seems to limit these rules to new loans but I believe that holders of Seconds will be fearful that the law will be extended by the courts to all loans. If that happens the Second becomes worthless. I think that this threat will induce the seconds to take what they can get in a short sale.

For more information contact David or a broker that specializes in short sales.

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