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I'm Considering A Short Sale On My Home In Santa Monica, CA. Can My Lender Sue Me? Series 6

I'm Considering A Short Sale On My Home In Santa Monica, CA. Can My Lender Sue Me? Is a question that comes up from luxury homeowners considering a short sale. Please read further for information directly from the CAR legal series on short sales.

Q 6. Can a lender avoid the "foreclosure process" and just sue the borrower on the note (i.e., treat it as an unsecured note)?
A No. In the event of a borrower's default, the lender has two options--a judicial foreclosure or a trustee's sale foreclosure (either one is referred to as the "foreclosure process"). However, a lender cannot opt to sue on a note secured by a mortgage or trust deed instead of going through the foreclosure process by treating the note as an unsecured note. This restriction is referred to under the law as the "one action rule" or "one form of action rule." (Cal. Code Civ. Proc. § 726.) A lender might prefer to sue on the note instead of foreclosing when the note is for a greater amount than the value of the property securing the note. That way, the lender can get a judgment and attach a lien against other property, personal or real, owned by the borrower. The "one form of action rule" prohibits the lender from this "third" option.

One exception to the "one form of action rule" is if the security for the loan has become "valueless" after the lender's security interest was recorded (e.g., this would be the case for a "wiped out" junior lien holder who now holds an unsecured note). In this case, the lender can sue directly on the debt (note) unless the borrower's loan falls into category (1) or (2) in Question 4.

Luxury Short Sale Designation
Posted Wednesday Jan 18