California Anti-Deficiency Statutes
If you are reading this page, it’s because you are attempting to understand whether or not a deficiency-judgment will follow you after your home is foreclosed upon and/or whether you need to file bankruptcy in order to avoid paying on a post-foreclosure deficiency judgment. The problem is that there is too much information on the internet. To make matters worse, different states have different laws with regard to treatment of deficiency judgments. Below is a basic summary of the California Anti-Deficiency Statutes.The Law
The California Anti-Deficiency Statutes are derived from California Code of Civil Procedure Sections 580, 580a, 580b, and 580d.Deficiency Judgment—Generally Defined
First, you must know what a deficiency judgment is before doing anything else. First, let’s break down the two words into easy-to-digest terms in the context of a foreclosure. Deficiency—unpaid loan balance after foreclosure sale; and judgment—an order of the COURT—not the bank—the court. Put together, this means that in the context of a foreclosure, the lender must have filed a lawsuit with the court and asked the court to issue a judgment against the homeowner for the “deficiency” (unpaid balance) owing to the bank.
Illustration : Joe Homeowner’s house is severely underwater. This means he owes much more to the bank than what the home is worth. Being laid off from work, he can no longer pay the mortgage payments. As a result, his lender begins foreclosure proceedings against him. The market value on the home is $150,000 and he owes $400,000. In order for the bank to obtain a deficiency judgment against Joe Homeowner, his lender will need to file a Summons & Complaint with a court of law. If Joe Homeowner has no legal defenses and/or fails to defend himself in court, the judge will then issue a “judgment” against Joe Homeowner, thereby granting permission for the lender to foreclose on the property and authorize the lender to pursue Joe Homeowner for any deficiencies.
The point to be made here is that a deficiency is procured through a legal process only. This is important to understand because many people believe that a trustee will issue a deficiency judgment against the homeowner after the home has been foreclosed upon. A trustee is NOT a judge; further, a non-judicial foreclosure is the opposite of a judicial foreclosure. Non-judicial foreclosures are almost always the type of foreclosure process undertaken by lenders. Why? Because they are cheap and fast—taking as little as four months as compared to months (or years) with a judicial foreclosure.Applying California Anti-Deficiency Statutes to the Foreclosure Process
Code of Civil Procedure section 580(b)
CCP section 580(b) sets forth that a lender is prohibited from seeking a deficiency judgment against a borrower if he incurred the loan for the sole purpose of purchasing the home. (This includes seller carryback loans.) These are known as “money-purchase loans.” If the subject property is the residence of the debtor and a one-to-four unit property and the money was used to purchase the property, then CCP 480(b) prohibits the lender from seeking a deficiency judgment against the lender. This is also why lenders go through the non-judicial process of foreclosure on the borrower’s residence.
Money-purchase loans are, in California, commonly known as non-recourse loans. This means that the only recourse the lender has is to sell the home to pay the money owed. To be clear, this means the lender can’t sue the homeowner for the balance on the loan. For instance, the lender can’t take your cars, can’t take the cash sitting in your bank accounts . . . he can only foreclose on the home and used the sales proceeds to pay the amount owed. Ten years ago, the lender would have received full payment on the amount owed because back then the value of homes were much higher than the amount owed. Today, it’s the reverse. Regardless, the lender’s only recourse is to foreclose on the property.
If a homeowner has a first mortgage and second mortgage, and both loans are money purchase loans, then neither lender one or lender two can seek deficiency judgments against the homeowner.
If one or both loans are NOT money purchase loans, then a lender can, technically, seek a deficiency judgment if they file a lawsuit in a court of law. For example, loan number one is a money purchase loan and loan number two is an equity loan or other type of loan that was not used to purchase the home. If lender one conducts a non-judicial foreclosure (trustee’s sale), then owner of the second loan (can be the same or different lender) can seek a deficiency judgment against the homeowner through the judicial process.
Code of Civil Procedure section 580(d)
CCP section 580(d) sets forth, in plain terms, that if a lender sells a home under a power of sale , contained in the mortgage or deed of trust (trustee’s sale), then he cannot also sue the homeowner in a court of law for the deficiency. This is sometimes referred to as the “one bite rule.”
Illustration: Joe Homeowner purchased his home in 1980 for $100,000. Over a period of 20 years, he refinanced his loan several times—using the various loan proceeds to make improvements to the home, pay off debts, pay college tuition and so forth. The total amount owed today is $450,000; however, the market value today is approximately $200,000. A few months ago, Joe Homeowner was laid off and soon thereafter, went into default with his loan. Assuming Joe Homeowner does nothing to save his home, e.g. submitting timely loan modification, his lender will begin the foreclosure process. Since non-judicial foreclosures are faster and cheaper, the lender (as is almost always the case), will commence a non-judicial foreclosure. Four months later, the home is sold.
Can the lender then come after Joe Homeowner for the deficiency since the loan was not a money-purchase loan? No. Here’s why: under the “one bite rule”, the lender had the option of foreclosing via a non-foreclosure process (trustee’s sale under a power of sale) or judicial-foreclosure. If the lender had filed a lawsuit instead of foreclosed under the power of sale clause in the mortgage instrument, the lender would have preserved his legal right to seek payment from the homeowner for the deficiency. Because lender did not file a lawsuit, he forever LOST his right to seek a deficiency. In other words, the lender can’t have the best of both words—quick/fast foreclosure outside of court AND collection of deficiency from the lender—it’s either fast/cheap foreclosure with no right to collect deficiency or slow/expensive judicial foreclosure with deficiency judgment claim.How Can Ms. Garrett Help?
A homeowner can hire Ms. Garrett to assist them in connection with the following issues:
- Assist the homeowner to determine (or confirm) the type of loan(s) they have associated with their home;
- Advise the homeowner, after conducting a thorough analysis of their mortgage loan history and financial situation, whether or not they qualify for any type of loan assistance, e.g. HAMP, HARP, etc.
- Explain the pros and cons of various options, e.g. foreclosure, short-sale, loan modification, bankruptcy, loan deferral, and deed-in-lieu of foreclosure;
- Explain alternative options in the event the homeowner has possible exposure to deficiency judgments;
- Help the homeowner make informed decision in connection with their distressed property;
- Explain alternative options to non-owner-occupied loans, e.g. rental properties.
- Answer any questions related to distressed property