Legal Question in Real Estate Law in California

First, let's be clear about the terms. The "mortgagor" is the borrower. The lender, or party holding the mortgage as security, is the "mortgagee."

Next, in California, true mortgages are rarely used. Borrowers generally make a promissory note, which is secured by a "deed of trust." The practical differences between them are, nowadays, very slight, but historically they were quite different as to the means of foreclosure and other aspects. It is very common for both borrowers and lenders to talk about a mortgage when in fact it is a note and deed of trust.

In California, if a borrower stops paying and the lender (or current beneficiary of the note and deed of trust) decides to foreclose, it will usually do so by having a trustee sell the property under a provision of the trust deed called a "power of sale." Such sales are commonly referred to as foreclosure sales, although in a super-strict technical sense a trustee's sale is not a true foreclosure. After such a sale, the foreclosing lender may not seek to recover any shortfall in the sale proceeds from the borrower. Therefore, the answer to your question is usually no.

The limited circumstances where the lender can come after a borrower for a deficiency in the foreclosure sale proceeds coverage of the outstanding debt are where:

(1) The lender sues for foreclosure in court instead of selling privately through a trustee, and (a) the loan being foreclosed is not purchase-money (i.e., was a refinancing or cash-out loan) or (b) the loan is a junior loan where the lender has lost his security (collateral) through no fault of its own; or

(2) The lender sues the borrower, not for the deficiency itself, but for some kind of tort such as loan-application fraud or deliberate damage to the property.

There are also some fine points involving whether the property was owner-occupied residential rather than income property, etc., but this will give you a basic idea.

We are also finding that lenders are showing a strong preference for the speed and simplicity of trustee sales rather than going to court to foreclose and then seek a deficiency judgment that they may never be able to collect on because the debtor has no assets, or raises defenses to suit. Even where the lender could go for a deficiency judgment, they often don't. Factors that tend to puch lenders to go after borrowers for deficiencies include the borrower's lack of cooperation, a belief that the borrower has lots of other assets, the borrower's failure to take good care of the property, or where the lender is not a big bank that can absorb the loss, but instead is a relative, a small investment partnership, a trust or pension fund for a small business, or other entity that needs to watch out for every dime.

I agree with Mr. Whipple's response, however I note that his statement that lenders are usually only foreclosing through a nonjudicial foreclosure sale only applies in my experience to institutional lenders. I have several cases in my office right now that involve private parties as lenders and they went the court route.

Mr. Whipple and Mr. Roach are both correct. I am prosecuting a judicial foreclosure right now on behalf of a private lender. I would also add that Mr. Whipple is wrong on one point, though it doesn't matter to your question. The California Civil Code provides that all deeds of trust are mortgages as a matter of law.