Legal Question in Real Estate Law in California

I will start with the assumption that the loan is secured, only, by your home, a single family residence, i.e. the entire loan transaction was that the lender loaned you money, and you signed a Promissory Note and a Deed of Trust. If there were other papers signed, such as a security agreement, giving additional collateral, the story will be different. So, here's the answer, based on my assumption:

If the loan was to actually purchase your home, the lender can only foreclose on your home. That's it. Even if the lender sells your home and does not recover the full amount of the debt, you are off the hook, with the home sale. No other assets are at risk.

If the loan was not to purchase the home, but, rather was to refinance it or it was a second (or later) loan, then the lender has two choices: (1) non-judicial foreclosure; or (2) judicial foreclosure. Let's review each.

In a non-judicial foreclosure, the lender simply serves a Notice of Default, letting you know that you have 3 months to bring your loan current. If you do not, then the lender can publish a Notice of Trustee's Sale, indicating that, within 21 days, your home will be sold. If the lender takes this course, the sale of your house will end your obligation, even if the lender did not recover all of its money, from the sale.

In a judicial foreclosure, the lender files a lawsuit against you, in court. After litigating the case for many months or even more than a year, if the lender obtains a judgment against you, the judgment will indicate that the lender can sell your home PLUS, if the lender does not recover all of its money, then the "deficiency" (amount still owed after the sale) will become a money judgment against you. Then, the lender can go after your other assets to satisfy the "deficiency judgment."

I know this law is complicated, so you may want to speak with an attorney who is familiar with these real estate issues. Generally, the law to which I have been referring is called the "anti-deficiency statutes" because they prohibit all deficiency judgments for purchase money loans and limit deficiency judgments, in non-purchase money loans, to judicial foreclosures.

I have found that many attorneys know about these issues, but many more do not. Be sure to find someone with a background in real estate law.

Any loan secured by a deed of trust with a power of sale clause - whether purchase-money or refi, first or second -- can be foreclosed by either of the two methods. Method #1, foreclosure by trustee's sale, is quick, easy and cheap, and lenders choose it more than 99% of the time, but they are precluded from obtaining a judgment for a deficiency in the sale proceeds. Method #2, judicial foreclosure, although it is the only foreclosure method that allows recourse to the borrower's other assets, requires filing and serving a lawsuit, and is usually chosen by lenders for as a poor second choice for one of the following reasons: a) The deed of trust, mortgage or other loan documents are defective or irregular in some way, e.g., fail to contain an enforceable "power of sale" clause; b) the lender senses that the defaulting borrower has loads of money and could easily satisfy a deficiency judgment; or c) the lender thinks it has been jerked around or defrauded and wants to teach the borrower a lesson.

In addition to the requirement that the foreclosure be done in court to get a deficiency judgment, all purchase-money loans for one-to-four unit, owner-occupied residences are exempt from deficiency judgments. So, you see that there are some safe harbors for homeowner-borrowers.

There are two additional cautions, however. First, holders of second mortgages (or second deeds of trust) who become unsecured because of a foreclosure by the holder of the first can sue, because they have lost their collateral through "no fault of their own." Second, a ticked-off lender can sue a borrower for something other than the borrower's inability to pay the loan, and such suits often are not covered by the antideficiency statutes. For example, if a borrower has committed loan-application fraud, the lnder might sue for losses incurred as a result of the fraud. Another example is that a lender can sue a borrower for what is called "waste," but really means not taking proper care of the collateral - such as not fixing a plumbing leak before it destroys the floor, not paying the fire insurance or property taxes, or logging off the landscape trees three days before the foreclosure sale and selling them to the sawmill for lumber.

We are not seeing much bloodthirsty activity by larger, well-established financial institutions where reasonably honest borrowers are involved. Most of the hard-nosed deficiency-seeking is by private lenders, or where the borrower has behaved badly or is wealthy and trying to get away with dumping depreciated speculations. Can't say it doesn't happen, but don't lose a lot of sleep over it. A foreclosure will do moderate damage to your credit rating and your pride, not to mention having to move into a rental that won't be as nice as your house, but if you are just one of the myriad victims of the economy, you're otherwise pretty safe as far as your car and savings go.