Legal Question in Real Estate Law in California

Re: Foreclosure

The rules aren't very simple, but the ones that cover 98% of all situations can be set forth in the scope of a LawGuru answer:

Your first concern is whether the foreclosing lender can get what is called a "deficiency judgment" (DJ) for the balance due after a foreclosure sale. The answer is that it cannot get a DJ if (a) they foreclose by trustee's sale under a power of sale in a deed of trust, OR (b) if the loan being foreclosed is a purchase-money loan on your personal residence. If the loan is not for purchase money AND the lender goes to court to foreclose, a DJ is possible. The same rules apply to properties other than your personal residence with the exception that the loan must have been a purchase-money loan from the seller rather than a third-party lender.

A lender can usually choose whether to foreclose by trustee sale or by taking you to court. The former is usually preferred because it is quick and cheap, but if the lender smells blood it will resort to suit to get a DJ and use it to attack your other assets.

The second area of concern is junior lenders. If the holder of a first D/T forecloses, the holders of subordinate notes lose their collateral and become "sold-out juniors" in technical parlance. They can sue on their notes but the notes are unsecured after the foreclosure of the senior lien. If they sue successfully, they can get judgment liens on your other property.

The third area of concern is that although a foreclosing lender maybe can't sue for a DJ, it may be able to sue for another reason, such as waste committed on the property (such as logging off the timber or causing a toxic spill), or for fraud in making your application for the loan, e.g., overstating your income.

Finally, where there are multiple loans on one property, or you own multiple properties, there is some possibility that the loans are cross-defaulted or cross-collateralized. This is unusual with residences, but when you are in the real estate investment business, the possibility increases that a default on Loan A is also a default on Loan B, or the loss of Collateral X is a default on Loan C. Therefore, it is worthwhile to re-read the notes and see if there are cross-references.

As I said, this covers most, but not all, conceivable situations. If you still have concerns, better take your loan docs. to a lawyer near you.