Legal Question in Real Estate Law in California

Re: Does a Lender have a right to forclose

No, the lender cannot foreclose.

Under Family Code section 1102, both spouses must join in executing any conveyance or encumbrance on community property. Thus, the lender has no enforceable security interest. See Droeger v. Firedman, Sloan & Ross (1991) 54 Cal.3d 26. In response to this decision, the legislature created a very limited exception -- one spouse may encumber his or her interest in community property for the purpose of securing payment of attorney fees in a divorce action. (Fam. Code 2033).

However, the story doesn't end here! The creditor may be unsecured because it can't foreclose, i.e. has no claim on the community property, but the debt remains a valid unsecured debt of that spouse. The creditor can still sue the spouse on the debt. If the creditor wins and files a judgment lien, that lien will encumber both spouses' interest in the community-property house, because community assets can be applied to pay the debts of either spouse.

So, the creditor may have a back-door way to avail itself of the house, but it is not through foreclosure per se, it is through suit on the debt, followed by recordation of a judgment and enforcement of the judgment lien.

There is one other caveat. In order to be safe from foreclosure, the house must be community property of record. If it really is community property but the public record shows something different, i.e. joint tenancy or tenancy in common, the foreclosure can proceed so long as the foreclosing creditor did not have actual notice of the fact of community property.