Legal Question in Real Estate Law in California

This question, with minor variations, comes up all the time these days.

The most general answer is that for most borrowers, the risk is somewhere between tiny and nonexistent. That would apply if the loan that might be foreclosed is the only loan on the property and is a purchase-money loan. Such borrowers are protected by law against judgments (and hence liens on other properties) for foreclosure deficiencies, and are in a strong position to demand that a short sale also extinguish the debt (not all do). Their only risk is a collateral suit for something other than the payoff deficiency, such as fraud on the loan application or waste of the collateral. Such suits are rate, but possible.

Even borrowers who have refinanced are likely to escape without a deficiency judgment if the lender forecloses by trustee sale, as do most. Borrowers with second mortgages are subject to suit from the second-position lender after the first forecloses and the collateral is sold without paying them off, however (these are so-called "sold-out junior" lenders).

There is a very remote possibility that your loan might be double-collateralized by a deed of trust naming more than one property, or by two deeds of trust on different properties. Instances of such cross-collateralization are rare in single-family residential lending.

If you can provide a little more info about seconds, refinancings, and whether this is an institutional or "private" lender, we can customize the answer some.

The answer to your question is going to depend on several factors, such as whether there are junior encumbrances on the property going through short sale or foreclosure, whether the short sale comes within the ambit of Code of Civil Procedure section 580e, and, as Mr. Whipple points out, whether the bank forecloses by way of trustee's sale.

Several of my clients have brought to my attention that lenders are selling off bad debts to collection agencies, after a foreclosure sale, when those are indeed barred, which is causing annoyance to borrowers.