Legal Question in Real Estate Law in California

Loans made by third-party lenders on single-family homes that are not owner-occupied are not covered by the prohibition against deficiency judgments contained in Code of Civil Procedure (CCP) section 580b. Hence, a judicial foreclosure and a deficiency judgment under CCP 726 could be obtained, but the whole process is time-consuming and costly.

Really understanding these laws would probably entail going through actual litigation to experience how they play out in court. Or, as a less painful learning experience, you might go to your local law library and study, for example, what the Miller & Starr treatise on California real estate law has to say about judicial foreclosure. See especially Chapter 10 thereof, parts 221 to 241.

I think that, all in all, judicial foreclosure and deficiency judgment is something to avoid whenever possible, and hopefully in a rising market it will become increasingly unattractive and unnecessary.

There are no anti-deficiency laws in California that apply to investment properties. The only anti-deficiency law is limited to purchase money loans on the borrower's principal residence. There is, however, the "one form of action" rule, which is similar to but not quite the same as an anti-deficiency law. In California traditional mortgages are essentially never used. Instead we use deeds of trust with power of sale. The difference is what allows lenders to use a Trustee's Sale, sometimes called "non-judicial foreclosure," in order to take or sell the property in the event of default on the loan. This is unlike other states where every foreclosure requires a lawsuit. In addition to the expediency of a trustee's sale compared to a lawsuit to foreclose, there are very few grounds for preventing or attacking a trustee's sale, and there is no right of redemption that allows the borrower to pay off the loan and get the property back after the trustee's deed has been delivered. These advantages come with one major drawback: the one form of action rule, which essentially provides that once you proceed with a trustee's sale, you give up the right to sue for any remaining balance on the debt. The only way to foreclose AND get a judgment for any deficiency is by using a foreclosure lawsuit, i.e. a judicial foreclosure. So once the trustee's sale goes through, the one form of action rule acts the same as an antil-deficiency law - the key diffence being that it is a voluntary election of remedies as opposed to a blanket anti-deficiency law. Also, the lender can proceed with both the trustee's sale process and a foreclosure lawsuit at the same time. The one form of action rule only comes into effect when the trial starts or the trustee's sale goes forward. Because of the significant advantages of the trustee's sale over a foreclosure lawsuit, lenders almost never choose the lawsuit except in cases of fraud by the borrower or where there is a huge shortfall and the borrower has plenty of money to pay the deficiency.

California currently has three (3) key anti-deficiency statutes.

Code of Civil Procedure section is known as the "Purchase Money" prohibition and provides that no "deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a swelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part by the purchaser.� (Code of Civ. Proc., � 580 subd. (b).)

Thus a deficiency judgment is prohibited in three situations: 1) When the purchaser in an installment land sale contract fails to complete the terms, regardless of whether the property was occupied or even residential; 2) When the purchase of the property is financed by the seller, either in whole or in part, regardless of whether the property is residential or occupied by the owner; and 3) when a third party finances all or part of purchase of property that a residential dwelling occupied by the purchaser. Note that only the third category is dependent on occupation and residence. The first two do not. This is a huge mistake made by other attorneys that results in further malpractice claims.

Code of Civil Procedure section 580d prohibits a deficiency judgment after the exercise of the power of sale in a deed of trust or mortgage. That means once a foreclosing lender has a private trustee's sale, they are stuck with what they get at the sale and cannot sue for the difference. That means if a foreclosing lender wants a deficiency judgment, they will have to sue for foreclosure. There are other limitations that arise during the lawsuit, called fair value limitations.

Finally, Code of Civil Procedure section 580e prohibits deficiency judgments in certain specified "short sale" arrangements.

Determining whether some or all of these apply to your situation is factually intensive, and should be done by a competent real estate attorney.