This topic is discussed in the comments a many blogs. Below is a sample. I think the post author probably has a good understanding of the issue. If the security does not go back to the lender, why would the entire debt be wiped out. Consequently loan forgiveness tax liability might attach.
Why would Seller with non recourse loans agree to do a short sale without legal advice. A non recourse seller may be able to protect her/himself by negotiating certain language into the transaction, but I am willing to bet not one transaction done without the aid of california real estate attorney has that language.
Below is the quote:
L.A. Land : Los Angeles Times : Sept. sales: 67% below bubble peak: "he non-recourse deal doesn't just apply for short sales where the borrower sells before they lose title to the property. It applies for foreclosures/trustee sales too, where the bank takes possession, and sells it at auction or as an REO. If their recovery from that process still does not cover loan amounts due, the borrower is still personally liable for the debt, except when the loan is non-recourse. Short sales can occur on recourse loans too. If the note-holder wants to cut its losses and avoid costs of later litigation and rapidly declining asset value, it can approve a short sale AND forgive the personal liability of the loan. Forgiveness is possible but not likely, since it costs relatively little to get a debt judgment in court, then monitor property records to make sure the borrower doesn't win the lottery or something."
