Judicial Foreclosures in California Part I - Code of Civil Procedure Section 580(a)

The Dreaded Deficiency Judgment

Most people are familiar with the non-judicial foreclosure.  This is a private Trustee's Sale that follows the statutory guidelines of California Civil Code Section 2924 et seq.  California is a trust deed state instead of a "mortgage" state so we generally do not use terms like "mortgagor", "mortgagee" etc. and instead the parties are the Trustor (borrower), the Beneficiary (lender) and the Trustee.

When the borrower seeks out a loan, the borrower executes a promissory note and deed of trust.  The deed of trust contains the power of sale.  The borrower give the Trustee the power to sell the borrower's house (the collateral) if the borrower fails to make loan payments to the beneficiaries (bank/lender).

The non-judicial foreclosure is the quickest way for the bank to take the collateral once the borrowers have stopped paying.  For years, the Bay Area experienced soaring house prices and lenders did not need to worry about any deficiency on their loan if the lender had to take a property back at sale.

These days, the house prices are less rosy and lenders are facing a market where the value of the home is LESS than the loan.  That is the dreaded deficiency.

If the borrowers are still working age, or have other assets, lenders may choose to pursue a judicial foreclosure and seek a deficiency judgment.  What does that mean? It means that the bank will file the Complaint in Superior Court and the sale will not be a private remedy.  Instead, the foreclosure would be conducted by a sheriff--a public sale.  After the sale, the difference in the "fair market value" and debt amount will be the deficiency judgment against the borrowers.

Example - Borrower owes $500k.  The house is worth $400k (as determined by the court appointed independent appraiser "referee") at the time of the sheriff's sale.  The actual sale price may be higher or lower than $400k and Court may issue a deficiency judgment for $100k.

This means the bank has taken the house, sold it, evicted the borrower and the borrower has a judgment against them for $100k.  The bank can then enforce that judgment in a number of ways, such as wage garnishment or if the judgment debtors owns other property, levy against it.

Borrowers may have thought they were safe to walk away from their homes that were in foreclosure because they thought that California's anti-deficiency laws protected them.  What is the anti-deficiency statute?  That is California Code of Civil Procedure Section 580(b) and this applies to purchase money loans and purchase money loans on residential 1-4 units owner-occupied.

Comments

[Bruce Abbott]

Does the 'owner-occupied' requirement apply if the borrower, subsequent to closing, abandons the property or rents it out?

[John]

After reading this post, I got a clear idea about the non-judicial foreclosure and its process. Now i can go for non-judicial foreclosure.

[dmc]

I have 2 homes with the
same mortgage co. I can
only keep one. Will they
come after me for mortgage
balance on 2nd home.
Thank you

[Elda]

If my home is in default and the bank is telling me they are going to sell it under a Deed of Trust and I have a line of credit on that home is that line of credit handled in another action?

[Elda]

I also wish to know if a home is sold under a Deed of Trust, is it a non-judgmental sale and if yes does it mean the sale fulfills the loan and the loan is satisfied.

[Jeanine Lewis]

If I refinanced with a first and a second loan, both of which were for the payment of a loan and both of which include power of sale clauses, following foreclosure, can the second lender obtain a deficiency judgment? How will I know if the lender obtains a deficiency judgment?

[Second loan]

I must appreciate your work. from last couple of days i was searching for something interesting and this post is really nice. Thanks for this nice post.

[Aaron]

Julia,

Came across your blog while fact checking a blog that takes a more finance-centric look at the mortgage crisis.

In it, the author builds an argument on the fact that anti-deficiency statutes are fairly universal. A quick review it seems that is not the case.

Do you have a ready list of which states do and do-not have anti-deficiency statues? If not, do you have any idea how to answer the question short of looking at civil procedure for all 50 states?

Regards,
Aaron

[Brad Gill]

Julia, Have you seen any lenders pursue a judicial foreclosure in CA over a power of sale? If so, what is there any trends showing lenders choosing a judicial foreclosure over a power of sale on recourse loans?

[alan]

I am owed a large sum of money and have two trust deeds on two investment properties where the value is now less than my loans. I am in third position on each one and borrower is in default. The borrower owns several other properties with a net worth of over a million after mortgages, but one particular property has about $800k of equity.

Can I do a judicial foreclosure if they are current on paying the 2 loans that are senior to me?

How much money will it cost to complete a judicial foreclosure? And how much time till I win a deficiency judgement?

Do we have to wait till the one year seller buyback period is over before I can sue for a deficiency judgement? Is a deficiency judgement based on the loan amount minus the fmv or minus the sell price? Is a deficiency judgement automatically awarded, or in some cases can the judge rule no deficiency judgement?

When I win a deficiency judgement, will I be able to attach the judgement to one of the borrower’s other properties with equity?

What’s to keep him from shifting title to his assets to partners to avoid my judgement? Can a stay or lis pendens be placed on his properties up front?

If I can attach the deficiency judgement to another one of his properties, then can I demand payment immediately or foreclose on that property to collect my money? So essentially I might end up with the property that has $800k of equity?