Legal Question in Real Estate Law in California

It is a complex body of law, but generally refers to the concept that a lender who conducts a non-judicial foreclosure (also known as a trustee's sale) cannot obtain a deficiency judgment against the borrower, no matter the value of the asset. So, for example, if the loan amount was $500,000 but the property was only worth $400,000 at the time of the sale, there is a $100,000 'deficiency' in the value of the collateral. If the lender elects to conduct a non-judicial foreclosure sale, it waives the right to collect the potential $100,000 deficiency judgment.

This rule generally only applies to first mortgages and not second or third mortgages. Also realize that even if there is no 'deficiency judgment', the borrower may receive a rude surprise when he or she learns that she has 'earned' phantom income following such a sale that has tax consequences. In the example above, the lender may report to the IRS that the borrower 'earned' $100,000 of income because the 'deficiency' was essentially forgiven by the lender's choice of remedies.