"Can A Lender Obtain A Deficiency Judgment Against A Defaulting Borrower Following Foreclosure?" Series 5

One of the top questions Seller's ask when deciding to pursue a short sale. Will I be responsible for the unpaid balance, "deficiency" amount for my loan? See below for info on CA, anti-deficiency statues take from CAR legal services. Be informed, make the best decision you can with relevant information.

Q 5. Can a lender obtain a deficiency judgment against a defaulting borrower following foreclosure?

A It depends. California has "anti-deficiency statutes" that protect certain borrowers from deficiency judgments. A trustee's sale foreclosure does not involve the courts and does not permit the lender to go for a deficiency judgment. In order to be able to go for a deficiency judgment, the lender must use a judicial foreclosure (which involves a court proceeding).

Generally, there are five situations in which a deficiency judgment is prohibited:

1) Purchase Money. If the loan is obtained to purchase a residential 1-4 unit property all or part of which was intended to be owner-occupied at the time of the loan and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. (Cal. Code Civ. Proc. § 580b.) However, should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.

2) Seller Carryback. If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. § 580b.)

3) Trustee's Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure (a non-judicial action). (Cal. Code Civ. Proc. § 580d.)

4) 3-Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale. (Cal. Code Civ. Proc. § 580a.)

5) Fair Value Limitations. A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value. (Cal. Code Civ. Proc. §§ 580a, 726 (b).)

When a deficiency judgment is not permitted, a lender would opt for a trustee's sale foreclosure which is quicker and less expensive than a judicial foreclosure.

When a deficiency judgment is permitted, the lender may obtain one only following a judicial foreclosure, or when the security has become valueless (such as when security for a second trust deed loan is wiped out when the first trust deed lender completes its foreclosure). Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable. (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).)

Any questions? Kristine, 310-430-3948 direct.