Foreclosure and Upsidedown Mortgages

If the bank forecloses will you owe the bank the difference between your loan balance and what the bank receives at the foreclosure sale?

The basic answer is “yes” unless one of the anti-deficiency exceptions apply.
The difference between what you owe and what the property is worth is called a “deficiency”.

For example, let's assume when you bought your home it was worth $500,000 and you took out a mortgage for $450,000. Now, when the bank is foreclosing, the home is only worth $300,000. After foreclosure, under the general rule, you would owe the bank $150,000.

But there are exceptions to the general rule.

1. One Action Rule in CCP 580d. One of the most important exceptions is the “one action” rule set forth in CCP 580d. Under this rule the bank can only bring one legal action in connection with the foreclosure. Most banks use a streamlined foreclosure procedure called “non-judicial foreclosure” The bank just fills out a few papers and “voila” they’ve foreclosed and they own your property. But if the bank uses this procedure then they can not bring a second action and sue you for the deficiency.

2. The California anti-deficiency statute. Another exception to the rule that you owe the bank the deficiency is the California anti‑deficiency law. The anti‑deficiency law (California Code of Civil Procedure section 580b) prohibits a deficiency judgment against a borrower who took out a loan to:

a) Purchase (as opposed to a refinance)
b) residential property
c) where the property is one‑to‑four units.

I can give you several examples of situations where none of these exceptions would apply. In these cases you can and probably will be sued by a lender after the foreclosure:

You have a 1st and a 2nd. The 2nd was a line of credit that you used for paying off credit cards. The holder of the 1st forecloses in a nonjudicial foreclosure. This wipes out the 2nd deed of trust. The holder of the 1st can not sue for the deficiency because of the one-action rule of CCP 580d. But the holder of the 2nd did not foreclose so the protections of CCP 580d do not apply. And since the loan secured by the 2nd was not for the purchase of the property it is not covered by the anti-deficiency statute.

In this very common situation you can and probably will be sued by the holder of the 2nd.

When you purchased the property you took out a 1st and a 2nd on the property. But then you refinanced the 2nd. Again, the 2nd is not a purchase money loan it is not covered by the anti-deficiency statute. Since the 1st foreclosed the 2nd could not foreclose so CCP 580d doesn’t help you. You can and probably will be sued by the holder of the 2nd.
You only have a 1st on the property but you have refinanced. Then the holder of the 1st forecloses in a judicial foreclosure proceeding. You can be sued for the deficiency. CCP 580b doesn’t help you because the loan is not purchase money. CCP 580d doesn’t help because it was a judicial foreclosure.

As you can see, there are numerous cases where you run the risk of being personally sued for money damages after foreclosure. Let me review your situation and let you know where you fit in.

Keep in mind that in all these cases bankruptcy will eliminate the risk of a deficiency judgment against you. If you are potentially in one of these situations you need to talk to us about bankruptcy.

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