Legal Question in Real Estate Law in California

Re: banks go after amount deficient of short sale/foreclosure?

"Nonrecourse" is a somewhat slippery and possibly misleading term in the context of loans secured by California residential real property. Whether a lender has recourse to the borrower is determined by a rather complex set of statutes, influenced to some degree also by court rulings and in many cases by elections made by the lender. However, to be sure, the right of a purchase-money lender to look to the borrower is severely limited.

The most prominent example is that a third-party purchase-money lender (i.e., not the seller) can go after a deficiency judgment in the context of a judicial foreclosure (i.e., not a trustee sale) if the property was not a one-to-four unit residential property where the buyer intended to use one of the units as a primary residence.

Borrowers are also somewhat susceptible to collateral lawsuits for issues other than a shortfall after a foreclosure sale, including loan application fraud and waste. Waste as meant in this context is frittering away the value of the lender's collateral by things such as letting pipes burst and not calling the plumber or by logging off the landscape trees the week before the foreclosure sale and selling them to the sawmill. All such suits are relatively uncommon but if a lender is provoked by a borrower's bad attitude or suspected fraud, or if the defaulting borrower has deep pockets, suits are more likely.