Legal Question in Real Estate Law in California

The refinanced second is not a non-recourse loan. It will be an unsecured debt, collectable in court just like a credit card debt, after the foreclosure.

I disagree with Mr. McCormick.

First of all, the terms nonrecourse and recourse usually apply to promissory notes. The promissory note itself would state this, but it is rare. In California, the term recourse and nonrecourse really has to do with the interplay of Code of Civil Procedure section 726 and California's anti-deficiency laws.

The two key anti-deficiency laws are Code of Civil Procedure section 580b and section 580d. (A new anti-deficiency provision goes into effect January 1, 2011, and will be labelled section 580e. It governs deficiencies after short sales.)

Section 580d prohibits a deficiency judgment after a lender has conducted a nonjudicial foreclosure, known as a trustee's sale. Section 580b prohibits a deficiency judgment regardless of the manner of foreclosure, if the underlying transaction was a purchase money mortgage. Many lawyers believe that refinancing destroys any original purchase money mortgage protections.

I have been getting this question a lot lately from borrowers who anticipate or are facing foreclosure. In previous responses, I noted that the California Supreme Court stated, in passing, that a deed of trust given to secure refinancing of the original "purchase money mortgage" is not a "purchase money mortgage" and therefore not within the ambit of Code of Civil Procedure section 580b. "Accordingly, when defendant refinanced the property through the September 1967 loan from The Stanford Bank he lost the purchase money protection afforded by section 580b." (Union Bank v. Wendland (1st Dist. 1976) 54 Cal.App.3d 393, 400.)

The Supreme Court's statement that refinancing caused the debtor to lose the purchase money mortgage protection is arguably dicta, because that case really dealt with section 580d and not 580b. A review of secondary sources indicates that there is no bright line rule that refinancing automatically destroys the purchase money protection of Code of Civil Procedure section 580b. Subsequent decisions by the Courts of Appeal appear to have held that in some situations, refinancing does not destroy the purchase money mortgage protection. I cannot give you a definitive answer, because this is a factually intensive determination, and depends on whether the purchase money mortgage lost priority by reason of the refinancing, and what the proceeds were used for.

Arguably, the original second was not a purchase money mortgage, because it was a HELOC, and appears not to have been used to finance the purchase price of the residence. Thus a determination of whether refinancing destroyed the purchase money mortgage protection may be a moot point.

Finally, you have protection in the form of Code of Civil Procedure section 726. The security first provisions of that section can be raised to require the lender to exhaust the security before suing on the note. One of the general exceptions to that rule, is what is commonly called the frozen out junior lienholder exception. When a senior forecloses, the junior is wiped out, and the junior is not required to foreclose because there is nothing to foreclose on. The frozen out junior lienholder exception does not apply, however, where the same lender holds both the senior and junior liens. (Simon v. Superior Court (1992) 4 Cal.App.4th 63, 76-77.)(Evans v. California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 551.)

That appears to be the rule that governs your situation, because you state that both loans are from Wells Fargo.