With the spate of defaults on home loans, people have become increasingly concerned with life after foreclosure. One of the primary issues that people raise is whether or not a bank can sue the borrower after the home is foreclosed upon. For most people, a bank cannot come after a borrower for a deficiency judgment after a foreclosure due to the One Action Rule and the Anti-Deficiency Statutes.
The One Action Rule codified at California Code of Civil Procedure §726 basically provides that a lender can only bring one action or proceeding against a borrower in a foreclosure. As such, if a lender chooses to use the non-judicial foreclosure provisions, the lender cannot after the foreclosure sue for a deficiency. In general, lenders tend to choose the non-judicial foreclosure process in California as it is faster and does not involve use of the court system.
The second protection for borrowers is the Anti-Deficiency Statute codified at C.C.P. 580b and 580d. The statute is a provision under California law that is designed to prevent Lenders from pursuing borrowers after the foreclosure sale. Before the statute was in place, lenders would foreclose on a home, credit bid for a low price at the foreclosure, and then sue the borrower for the amount of the loan that was not paid by the foreclosure sale. The law provides that any Lender that pursues a non-judicial foreclosure on a purchase money loan cannot seek a deficiency judgment.
A purchase money loan is a loan where the proceeds were used to purchase the home. This is in contrast to loans that are refinanced or hard money loans which are loans that are taken out after the purchase occurs. Finally, and most importantly, a deficiency judgment is the order from the court that requires the borrower to pay the amount still owed on the loan.
The problem that occurs is that most borrowers have a first loan and a second loan or HELOC, both of which were refinanced. In that case, if the owner of the first loan forecloses, the owner of the second loan no longer has an interest in the property and would be able to sue the homeowner for a deficiency because they are a sold out junior lienholder.
Practice Pointer – California Courts have held that if the first and second owners are the same party, the owner of the second loan cannot move for a deficiency judgment. For more information about that ruling, please see a more in depth discussion on Dirtblawg.