Judicial Foreclosures in California - Code of Civil Procedure Section 580(a)
The 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. 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 infamous 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 $400k. The house is worth $300k (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 $300k 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?
California's Anti-Deficiency Laws
What is the anti-deficiency statute? It is California Code of Civil Procedure Section 580(b). 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.
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."
Basically in simple terms - the statute addresses 2 types of loans: purchase money loans and seller carry back loans. Under the statute, seller carry back 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).