This topic was addressed in a recent mailing out to Realtors in Washington, and I also heard about this issue somewhere else this week. So based on that I decided to do a short blog piece on it.

http://blog.seattlepi.com/realestate/archives/169061.asp

Yes, each state can be different. I think in most states the bank foreclosing (the first) would get nothing after a non-judicial foreclosure. But sometimes that bank might think they can do better than the short sale offer, so even the first might be reluctant to go along with the short sale.

As I understand California law, their right to pursue the owner is dependent on whether or not the loan was "purchase money"--a loan used to buy the property as opposed to a later refinance. That is different than Washington, so another example of how each state can be different.

But just to follow up on my answer, I'm unaware of anything in Washington law that would prevent a first or a second from pursuing an owner after a short sale, absent an express release. Arguably by agreeing to the short sale they're only agreeing to release the deed of trust. It's possible a court might someday hold that there is an implicit release under some theory. One court did recently hold a second couldn't pursue after a foreclosure by the first, but that decision was reversed by our Supreme Court. It just shows how the law can be uncertain. An express release, however, would presumably be certain.

I strongly suspect we may see lawsuits over this issue in the future. Banks might assign their debt rights to collection agencies years down the road. To the extent an agent gave advice on this issue, suggesting the owner would be released, the agent migth be liable. That's why I suggested that any seller contact legal counsel prior to doing a short sale. They should have their specific situation assessed under the laws of their specific state. Getting that advice protects both the owner and the agent. A short sale is not your typical run of the mill transaction, and should not be treated as such.

This just goes to show the differences between states reagrding real estate & law. In Florida the second mortgage hold would be left with zero in foreclosure. We usually offer the second holder $1,000. I guest the second in your case is trying to play bluff and see who blinks first. If the first sees this the first can sometimes exert some pressure on the second not to "crash" the deal.

Good Luck

If it goes to foreclosure the second will still be owed every penny (assuming it's Washington law. the first that forecloses, and otherwise a typical transaction).

I think a lot of agents assume the second and even the first will waive the deficiency, and even that a lot of transactions probably get done with the issue left open. But IMHO, unless there's an express release, the seller probably still owes the balance owing on any obligation.

Sellers, of course, should get their own legal counsel prior to completing a short sale.