Legal Question in Real Estate Law in California

Re: Subsidiary lien liability when house goes to foreclosure auction

First, any lender whose loan is in default can initiate foreclosure - it doesn't have to be the senior lienholder. Assuming it is, and assuming the proceeds of sale don't pay off the junior liens (which is common these days), these junior lien holders will become "sold-out juniors" and, having lost their collateral through no fault of their own, can sue the borrower as unsecured creditors. However, as Mr. Nelson mentions, if the junior loan was purchase money AND (as he doesn't mention) also the property was a one-to-four unit building occupied by the borrower as his/her principal residence, it is exempt from lender suit for deficiency.

Finally, lenders can also concoct suits for harm done them that's not directly related to default in making the payments - for example, for loan-application fraud, or "waste" (doing or failing to do something that causes the collateral value of the property to be eroded, such as not fixing leaky plumbing or selling the landscape trees to the sawmill).

Re: Subsidiary lien liability when house goes to foreclosure auction

I should also add another factor in determining whether a junior lender can go after a deficiency after the foreclosure of the senior loan.

Suit is barred on a seller-financed purchase-money junior loan, whether or not the property is a one-to-four unit residential building occupied by the borrower as principal residence. The rule allowing a junior lender to sue on a purchase-money loan applies to loans made by third parties and, as said earlier, and the property is not both (a) owner occupied and (b) a residential one-to-fourplex.

See Code of Civil Procedure section 580b.

Re: Subsidiary lien liability when house goes to foreclosure auction

Only 'initial purchase money' loans made at the time the house was purchased will be "absolved" by the lender doing a foreclosure. The other lenders will simply sue you for deficiency if they are not paid off by proceeds of foreclosure.