Generally, when a lender takes a loss on a mortgage loan by virtue of a foreclosure, short sale, or deed in lieu of foreclosure, it may have a right to seek a deficiency judgment against the borrower. Whether a lender actually has the right to seek a deficiency judgment depends on a number of factors including:
- Whether the loan is recourse or non-recourse;
- Whether the loan is a purchase-money loan; and
- Whether the state in which the property is located has enacted anti-deficiency laws.
Recourse Loans vs. Non-recourse Loans
If a loan is recourse, it gives the lender the right to seek a deficiency judgment in the event of a default by the borrower. If a loan is non-recourse, the lender does not have the right to seek a deficiency judgment in the event the borrower defaults; it’s only remedy is to regain possession of the property through foreclosure.
California Foreclosure Law
California is on the cutting edge of foreclosure law. Therefore, it’s imperative that any California homeowner who is facing foreclosure know exactly how California foreclosure law may protect him from a deficiency judgment.
- Security First Rule – The security first rules requires a lender with a security interest in real estate to foreclose before it can pursue a judgment against the homeowner. A security interest is created when the homeowner signs a promissory note and deed of trust and the lender has the deed of trust recorded.
- Single Action Rule – The single action rule prevents a lender from making multiple efforts to collect the debt from a homeowner who has defaulted on a mortgage loan.
- Acquisition Loan Rule – The acquisition loan rule prevents a lender from collecting beyond the security on a loan which the borrower obtained to purchase the property as long as the property is a one to four family residence which the homeowner occupied as his primary residence.
Depending on how these rules come into play in any homeowner’s situation, a lender may not have the right to seek a deficiency judgment in California. Moreover, if a lender chooses to use non-judicial foreclosure in a California foreclosure action, it waives the right to seek a deficiency judgment.
What Happens if a Lender Obtains a Deficiency Judgment?
Under California law, a lender has only six months after the foreclosure sale to seek a deficiency judgment. If a lender obtains a deficiency judgment it may pursue all remedies available under California law including wage garnishment and levy.
Getting Legal Help
If you have questions about how California’s foreclosure laws may impact your lender’s ability to obtain a deficiency judgment, you should speak with a qualified foreclosure attorney. A foreclosure attorney will review your loan documents to determine which laws apply and may even be able to assist you in using the applicable law as leverage to force your lender to approve a loan modification, short sale, or other workout agreement.
