Legal Question in Real Estate Law in California

You are wrong that California is a no-recourse state in the strict sense. There are, however, two ways a lender is legally precluded from recourse and they cover the vast majority of foreclosures. The first is for a purchase-money mortgage on the borrower's principal residence. Those are non-recourse loans by law. Once you refinance, that protection is lost. The second is if the lender avails itself of a non-judicial foreclosure of a deed of trust. 99.99% of the mortgages in California are deeds of trust. The document provides that the trustee on behalf of the lender gets "bare" title, meaning no rights of ownership except two - in the event of default on the loan, the trustee has the power to collect rents, if rent is being paid by a tenant, and has the right to sell the property at a trustee's sale. The trustee's sale is what most people think of as a foreclosure, but the lender has the option of a foreclosure lawsuit. If the lender choses to have the trustee conduct a trustee's sale, the "one form of action rule" bars the lender from seeking recourse for any deficiency. Only if the lender forecloses through a foreclosure lawsuit can they get a judgment for any deficiency between the debt and the foreclosure sale price of the property. Only a tiny fraction of foreclosures are done by lawsuit instead of trustee's sale, but the lender does have that option for any non-purchase money loan if the deficiency is large enough and the borrower has sufficient assets to make a lawsuit worth while. One other thing I should mention is that a sold out junior mortgage becomes an unsecured creditor and always has the right to pursue recovery of the unsecured debt.

It's more accurate to think of California as a state that has rather broad anti-deficiency laws than as a "non-recourse" state.

A couple of technical bones to pick with the previous answer. First, a trustee's sale is not a "form of action" and thus does not invoke the "one form of action" rule (Code of Civil Procedure section 726). Instead, a deficiency judgment after a trustee's sale is barred by a different provision, CCP 580d.

Second, whether the loan is secured by a deed of trust (99.99%) or is an Eastern-style mortgage (00.01%) it can be foreclosed by trustee's sale IF it contains a "power of sale" clause. It's the presence of the clause, not the type of security instrument, that gives rise to the power to foreclose by trustee's sale, rather than going to court.

As pointed out previously, you most likely have a promissory note secured by a deed of trust. If what you refer to as the original mortgage was for purchase, you were originally protected from a deficiency pursuant to Code of Civil Procedure section 580b, which is known as purchase money mortgage protection.

By refinancing, you took the original note and deed of trust out of section 580b, and a lender is not precluded from obtaining a deficiency judgment against you if they pursued a judicial foreclosure action against you. "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.)

As Mr. Whipple, pointed out, however, you may still be protected by Code of Civil Procedure section 580d. That section provides that "[n]o judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or

deed of trust."

Thus, where a lender elects to proceed nonjudicially, and foreclose through a trustee's sale, the lender is prohibited afterward from filing a suit on the remaining balance on the promissory note. This anti-deficiency statute does not insulate borrowers, however, from lawsuits for fraud or bad faith waste.

Mr. Whipple is also correct that the "one action rule" of Code of Civil Procedure section 726 is not the operative statute that bars a lender from a deficiency judgment after a trustee's sale.

Any non- purchase money mortgage means you can be sued for any deficiency after foreclosure by the lender, and that judgment is a lien on all your assets, enforceable by writ of execution on any assets they find.