Despite the record numbers of California homeowners losing their upside down homes due to foreclosures and short sales, there is a lack of accurate information about what happens when a home is lost to foreclosure or short sale. California law offers some unique protections to people who lose their primary residences to foreclosure through its anti-deficiency statutes (CCP § 580 and § 726).
California’s “one action” and “security first” rules are just part of California’s anti-deficiency laws. These laws are not only complex but currently in a state of flux. Thus, an experienced mortgage lawyer should be used when facing potential problems with a lender “coming after you” for the difference between the sale price and what was owed.
The anti-deficiency laws were written to prevent: (1) multiplicity of actions; (2) overvaluation of the security; (3) worsening an economic recession by holding debtors personally liable after losing their homes; and (4) allowing creditors to low-ball bids at the foreclosure sale to acquire property below market value and then going after the borrower for money.
Under CCP § 580(b) deficiency judgments are barred for purchase money loans of a primary residence. CCP § 580(d) specifically bars deficiency judgments after a non-judicial foreclosure. Thus, whether a primary residence (that has not been refinanced) is lost to trustee’s sale or non-judicial, all a lender can do is foreclose on that home.
Furthermore, California’s one-action rule (CCP § 726) means that a lender should go after the security first – that is, before going after the borrower for money, a lender should foreclose. Thus, in certain circumstances, foreclosure on the security is a lender’s exclusive remedy and no deficiency judgment can be obtained afterward.
While many primary homeowners should have no worries about deficiency judgments, those property owners who refinanced, own investment property, or own commercial real estate may have reason to fear personal liability. The one-action rule and the anti-deficiency statutes might not be applicable to these property owners. In these cases, a lender with a deed of trust may initiate either a trustee’s sale or a judicial foreclosure.
Unlike a trustee’s sale, a judicial foreclosure is a lawsuit where the lender must sue all parties having subordinate interests in the property in order to extinguish their interests upon the foreclosure sale. When successful, the lender will obtain a judgment ordering sale of the property and the sale will be conducted by a court-appointed officer. The proceeds of the sale are then paid out to the beneficiary, and thereafter in the same manner as a trustee’s sale.
The principal advantage to a lender in pursuing a judicial foreclosure is that the lender can obtain a deficiency judgment provided: (1) the loan is a nonrecourse obligation and (2) no anti-deficiency laws apply. Lenders are often apprehensive of judicial foreclosure, because like any other lawsuit, a judicial foreclosure is an adversarial proceeding and involves considerable time and expense. Furthermore, the borrower retains a statutory right of redemption whereby he or she can regain ownership of the property by paying the foreclosure sale price plus certain other fees for up to one year following the judicial foreclosure sale.
Fortunately, judicial foreclosures are very rare in actual practice, and most first mortgagees accept whatever they get through trustee’s sale as satisfaction of the debt.