Legal Question in Real Estate Law in California

The second mortgage holder is "wiped out" ONLY in the sense that it loses its collateral. It becomes an unsecured creditor. As such, it has the "disadvantage" that there is no collateral for it to take. It also has the advantage that it can look to the other assets of the borrower and is not limited just to the collateral. The general term for such lender-creditors is "sold-out junior."

However, there have been several appellate-court cases examining whether the rules applying to sold-out junior lienholders should apply when the junior and (former) senior liens were held by the same lender. If the second lienholder was also the holder of the first, and the two loans are somehow cross-collateralized, they probably will be treated as a single loan for deficiency purposes and the creditor may not sue on the second after conducting a trustee's sale on the first loan. See Union Bank v. Wendland (1976) 54 Cal.App.3d 393 and Simon v. Superior Court (1992) 4 Cal.App.4th 63; but also see National Enterprises, Inc. v. Woods (2001) 94 Cal.App.4th 1217, criticizing the Wendland decision.

California gives recourse only in limited circumstances. One of those is where a junior lender has lost its collateral through no fault of its own.

All in all, I think you may face some slight-to-moderate risk of suit, as the lender may have figured out how to word the loans to avoid the consequences of the Wendland and Simon cases and may have preserved its right to come after you as a sold-out junior, even though it became "sold out" due to its own action in foreclosing on its first. You may want to consider seeing a lawyer who is very familiar with lending laws and practices to see whether your lender could sue successfully or not.

You are mixing up a lot of legal terms that are as different as apples and oranges.

First of all, California doesn't use the term recourse/ non-recourse. True non recourse notes specifically state that they are "nonrecourse" meaning the borrower has no personal liability and that the lender is limited to the security as its sole recourse for any default under the loan. Those are extremely rare in this state.

Second, California doesn't use mortgages. The law provides for them, but no one uses them. The security instrument of choice is the deed of trust. People who do internet research regarding mortgages set themselves up for trouble because there are key distinctions between a mortgage and a deed of trust. The fact that laypeople call it a mortgage does not turn a deed of trust into a mortgage. (As in "Did you pay the mortgage this month, dear?")

California has anti-deficiency legislation. It has been place since the Great Depression. (I consider the Great Depression the period from 1929 until the day after Pearl Harbor.)

The key anti-deficiency provision here is Code of Civil Procedure section 580d. That section prohibits a lender from obtaining a judgment for a deficiency after having completed a nonjudicial foreclosure sale by exercising the power of sale in a deed of trust. A deficiency is the difference between what the property sold at the sale and the outstanding debt.

When a senior trust deed holder forecloses, the junior lienholders are wiped out, and become what are known as "frozen out junior lienholders." By case law, junior lienholders are permitted to sue directly on the note, when a senior's foreclosure has caused a loss of the security. (Bank of America Nat'l Trust & Sav. Ass'n v. Graves (1996) 51 Cal.App.4th 607, 611-613.)

The frozen out junior lienholder exception does not apply, however, if the junior trust deed holder also held the senior trust deed that was foreclosed. "In granting the writ, we hold that, where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust's power of sale, thereby eliminating the security for its junior deed of trust, section 580d of the Code of Civil Procedure bars recovery of any "deficiency" balance due on the obligation the junior deed of trust secured." (Simon v. Superior Court (1992) 4 Cal.App.4th 63.) Simon is not the only case on the subject.

The case cited by Mr. Whipple, National Enterprises v. Woods, appears to differ from your case. That case involved a situation where senior and junior debts secured by the same property were once held by the same creditor, which thereafter sells the loans to two independent parties.

If you would like consultation on this matter, I would charge $300, which would include review of all the documents and a letter to the foreclosing lender/ or collection agency.

The previous answers are correct, if a bit convoluted and legalistic. If you would like clarification or a personal consultation local to you, please feel free to contact me. I have over 25 years experience with these types of matters.