California's Anti-Deficiency Laws - a brief refresher

What is the anti-deficiency statute?  It is California Code of Civil Procedure Section 580(b).

The code states in relevant part:

"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for
not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."

In plain English - the statute addresses 2 types of loans:

1) purchase money loans and

2) seller carryback loans.

Under the statute, seller carryback loans are not entitled to seek a deficiency judgment against the borrower.  However, there is an exception under California's stare decisis (case law) that does permit the seller to recover against the borrower under certain circumstances.

As for the purchase money loans - no deficiency if it is owner-occupied, residential one to four.  What does that exclude? vacation homes, home-equity lines of credit (HELOC), investment properties where the borrower does not reside there, apartment buildings more than 4 units.

These loans are commonly referred to as "non-recourse" loans because lenders on these types of loan know their only recourse is the security (collateral).

DISCLAIMER: THIS IS NOT INTENDED TO BE A PRIMER ON HOW TO AVOID YOUR DEBTS AND LOAN LIABILITY.  CONSULT WITH A BANKRUPTCY SPECIALIST AND TAX ADVISER.  Please do not email or call me for tax advice.  I am not an accountant or tax professional. 

Comments

[Steve B.]

Assuming the first deed and Home Equity line of credit are with the same lender, but the HELOC was taken out at a different time, what ways can debtor be protected from lender coming after him for the HELOC after lender forecloses on the first?

[Steve B.]

Assuming the first deed and Home Equity line of credit are with the same lender, but the HELOC was taken out at a different time, what ways can debtor be protected from lender coming after him for the HELOC after lender forecloses on the first?

[shannon alton]

Pertaining to deficiency judgments: My HELOC (open end deed of trust) was used as original purchase money only and not as a line of credit. Does the State’s Anti Deficiency Law pertain to it and is it considered 'nonrecourse'?

[michelle]

in seller carry back as first position and home equitey line as 2nd, is foreclosure process 90 days? how long do I have in my house once I have been served a nod?

[kennedy]

Someone really decided to put on their thinking cap, great going! It’s fantastic to see people really writing about the important things.

[bob wiegand]

I have a problem. I bought a home, personal residence and lived in it. An LLC was formed for the purpose of remodeling the home. A member of the LLC invested, not loaned, 200k to the LLC which after i bought the home which i moved in and lived in, repaid my downpayment and some mortgage payments. i spent about the same amount of money on contractors and plans and upgrades and mortgage payments on the home. the investor wanted his money back so a trust deed was put on the home when it sold. i failed to read the trust deed and it said i was personally resposible for the 200k. There is no acknolegement of CONSIDERATION in the trust deed. I had the home for sale but the market fell and he promised to discount the note then renegged and killed the sale. It turned out he wanted to sue me for the full amount and since i could not afford the home since i spent all my money on contractorst it went back to the bank. he did initiate a foreclosure as well but failed to pursue it and let the bank take it over. I see now he had this all mapped out and i didn't understand what was happening. i am now face with poverty which will happen when he wins the suite.. am i screwed?

[David]

I refinanced my home in full to pay for a remodel of the home. I have only a first mortgage on the home and live in California. There is not a second mortgage and I live in the home. Am I protected under the anti-deficiency laws if I walk away.Is he mortgage.

[Roger]

I took a line of equity from BofA in Aug 2007 and house foreclosed in Nov 2008. We made payments on the equity line till Oct 2008 but when the foreclose proceeding started BofA started penalizing us by adding $500.00 a month to our initial payments of $300 a month. Their explanation on penalty "due to foreclosure the penalty is being added" (even though we were never late on our monthly payments). We called BofA and spoke with an agent and they were not able to help us and we stopped making our monthly payments as well. BofA never followed up and recently a collection agency out of East Cost called us to collect the debt of 52K.

My initial loan on the house was 505k 80/20 and then the equity line of credit of 55k. The house was sold in an auction after the foreclosure in Dec 2008.

Here are my questions:

A: What can the collection agency do to collect the debt?

B: Can they sue us in East Cost and we have to defend ourselves out there?

C: Can they put a lien on our other property?

We are looking forward to hearing form you.

[Michael]

If my lender agrees to a short sale on my refinanced house am I liable for a deficiency judgment in California?

[Anna V.]

I have a question about the anti-deficiency law. Are attorneys obligated to advise their clients to engage or not engage in strategic default given this law?

[Aaron]

My wife and I are doing a short sale, on our owner occupied home, our first and second mortgages (which were used to purchase the home) are approximately $338k with Bank of America, we are short selling for $200k, and we just got our approval letter today, but it says that BAC may pursue a deficiency judgement for the difference between the short sale price and what we owe. My realtor is under the impression that that is illegal in California, is that true? If so, how likely is it that they will take action against us? If I sign it does it waive my protection from them pursuing me for the deficiency?

[Patrick]

The analysis above is incomplete. You cannot discuss section 580b while ignoring 580d, which says, in relevant part:

580d. No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

This protects against both purchase money or refinanced money where the lender pursues a trustee sale as a remedy (as opposed to judicial foreclosure). It is unlikely that a lender will choose judicial foreclosure (a lawsuit) because it could tie up the property for years, at the end of which time the borrower could simply file bankruptcy on the deficient amount.

[Patrick]

580d also protects against deficiency on investment properties, as opposed to 1-4 unit dwellings.

[Jeanine]

If the purchase money loan was taken out as owner occupied/primary (with every intention to be a primary) but later became a rental property ( 6 months later) does that still fall under the anti deficiancy law?

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