California is best known as a non-recourse loan state that makes it hard for lenders to sue. Some states give lenders flexibility in how they pursue defaults, but many lenders choose not to sue because defaulting borrowers often don’t have much to sue for.
In California, a lender can’t get a deficiency judgment after a nonjudicial foreclosure. (Cal. Code Civ. Proc. § 580d). Since most residential foreclosures are nonjudicial, this means that most Californian’s going through foreclosure don’t have to worry about being on the hook to the foreclosing lender for a deficiency judgment.
WHAT ARE DEFICIENCY JUDGMENT LAWS?
Any financial institution that grants loans in exchange for a mortgage in real estate knows that a foreclosure is a distinct, and increasing, possibility. Typically, a completed foreclosure will result in a deficiency balance due the lender after the sale of property. In most states, it is possible to proceed against the borrower for collection of that deficiency balance. However, there are an increasing amount of states that do not allow recovery of a foreclosure deficiency balance.
There are currently eleven states that would be classified as “non-recourse”, in that there is a bar on collection of a deficiency balance after foreclosure.
California also has one of the most stringent anti-deficiency laws. California CCP § 580b(3) states that no deficiency judgment shall lie under a deed of trust or mortgage on a dwelling 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. The law reads that there can be no deficiency judgment after foreclosing on a “purchase-money loan” that was obtained for the purpose of purchasing the property. It does not matter if it’s a first, second, or third mortgage, or whether it was a home equity line of credit. If the borrower obtained the loan and granted a mortgage to the lender to secure all or part of the purchase price, no deficiency is permitted after foreclosure.
