Legal Question in Real Estate Law in California

Re: Auction home

What do you mean, "auction the home instead of foreclosure?" In the first place, a foreclosure sale by the trustee under the power of sale in a deed of trust is an auction. Second, a lender can't auction the borrower's property without doing a foreclosure.

It may help to think of it this way. A lender can foreclose in two ways: by exercising the power of sale clause in the deed of trust, which is quicker and cheaper and results in an auction being conducted by a trustee; or by going to court and getting a judgment followed by a court-ordered, court-conducted auction sale. These are called foreclosure under a power of sale and judicial foreclosure, respectively.

If a foreclosure sale by either method fails to pay off the lender, the unpaid balance is called a "deficiency," and in some circumstances the lender can get what is called a "deficiency judgment" against the borrower. Let's call it a DJ for short.

The lender cannot ever get a DJ if it elects to foreclose under the power of sale in a deed of trust. The lender also cannot get a DJ after a judicial foreclosure if the loan being foreclosed is a purchase-money loan. So, DJ's are pretty much confined to refinancing loans foreclosed through court action.

You, however, have a special problem situation in that you have two loans from the same lender, one junior to the other. Normally, if the holder of a senior loan forecloses, the holder of the second loses its collateral, but now has an unsecured claim against the borrower which it can sue upon. What happens when the same lender makes both loans? I don't know; I'm going to send as much of this answer as I've written so far, then go do some research and post another answer later.

Re: Auction home

Supplementing my previous answer.

I have found a case that says if the holder of both notes is the same party and the notes were executed at the same time, a court may treat the debt as unified and refuse to let the creditor claim "sold out junior" status on the second deed of trust after it has foreclosed the first deed of trust. This means, in the circumstances described (where the notes are held by the same creditor), there could be no deficiency judgment (DJ).

The case is Simon v. Superior Court (Bank of America) (1992) 4 Cal.App.4th 63. (Two later cases interpreting the Simon decision but not contradicting it are Bank of America v. Graves (1996) 51 Cal.App.4th 607; and Evans v. Calif. Trailer Court, Inc. (1994) 28 Cal.App. 4th 540.

One question not answered by any of these cases is what happens if the original lender sells one or both of the loans to different parties, so that at the time of foreclosure there are separate lienholders. My guess is the junior lienholder would be entitled to a DJ.

Therefore, I assume that lenders have figured out that all they have to do to place themselves in a position to make the second subject to a DJ is to sell it off to another holder. If you are lucky enough to have the two loans in the same hands, of course, then you'd be protected from a DJ bu the holding in Simon.

I should add that the antideficiency statutes do not protect a borrower against lender suits for torts such as waste or fraud in preparation of a loan application.