Going the route of a foreclosure at this point may mean that you lose your "forgiveness of debt" protection. The forgiveness of debt is typically considered income in the eyes of the IRS; however, the federal Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their PRINCIPAL residence. This is set to expire 12/31/12. CA law is in line with the federal law. You do not want to take the chance of the lender not foreclosing before this deadline.
SB458 became law on 7/15/11. This law prevents a deficiency judgment after a short sale in most cases on ANY Trust Deeds on one-to-four residential units. You can read more about the new law here:
"CA Senate Bill 458 Now Prohibits 1st/2nd Deficiency Judgments*"
As a summary, where applicable, a mortgage lender involved in a SHORT SALE (as opposed to a judicial foreclosure) is now PROHIBITED from engaging in any of the following acts:
1) Collecting a deficiency,
2) Having a borrower owe a deficiency,
3) Requesting a deficiency judgment,
4) Having a court render a deficiency judgment, or
5) Requiring the borrower to pay ANY additional compensation, aside from the proceeds of the sale, in exchange for written consent to the short sale.
1) A Lender seeking damages for fraud or waste;
2) the borrower is a corporation, LLC, or limited partnership;
3) cross-collateralized loan (special rules apply, not very common);
4) Borrower is a political subdivision of the state;
5) a bond lien; or, a public utility lien.
Another "benefit" of a Short Sale has to do with your ability to repurchase a home.
FHA financing normally requires THREE years from the short sale; HOWEVER, IF 1) the mortgage payments were made on time within the 12 months prior to the short sale, and 2) you aren't looking to purchasing a similar or larger home in the same area as short sale you can actually buy the very NEXT DAY after escrow closes on your Short Sale.
Conforming loan guidelines state a minimum of TWO years and 20% down; however, if the short sale was due to documentable "extenuating circumstances" (divorce, medical, job loss, death of a wage earner, etc.) then you only need 10% down.