Lenders, already hamstrung between unattractive alternatives when dealing with a problem loan, will soon be dealing with recently enacted legislation that could seriously impair the lender’s rights following a “short sale” of real property collateral. Borrowers, struggling to address defaulted loans by the sale of their real property collateral in a down market, may now face lenders who are less willing to consent to the transaction for fear of losing important rights.
A short sale is a transaction in which a lender allows its borrower to sell the real property collateral supporting a secured loan for a price that is less than the amount of outstanding indebtedness secured by the property. Short sales have been a useful and increasingly popular mechanism during the current economic downturn. According to recent statistics, short sales in California increased from only a few thousand in 2008 to approximately 90,000 in 2009.
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