When a property owner defaults on his or her mortgage, the mortgage lender will typically foreclose on the property.
That meaning, take it away from the property owner and make some attempt to resell it at what is known as a “trustee sale.”
However, sometimes the value of the property is worth less than the outstanding balance still owed on the mortgage.
When this happens, the mortgage lender may be tempted to sue the property owner in order to recoup its losses.
Fortunately, there are some protections available to consumers under state “anti-deficiency” laws.
An anti-deficiency law is a statute that prohibits or limits the ability of a mortgage lender to sue a property owner for debt owed on a mortgage or deed of trust.
What protections are offered under California’s anti-deficiency statutes?
California’s anti-deficiency statute is codified in Code of Civil Procedure Section 580b, which states:
(a) No deficiency shall be owed or collected, and no deficiency judgment shell lie, for any of the following:
(1) After a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale.
(2) Under a deed or trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein.
(3) 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 that was used to pay all or part of the purchase price of that dwelling, occupied entirely or in part by the purchaser.
(d) Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.
In California, there is also what is called the “one-action rule”. This rule, as provided in Code of Civil Procedure Section 726(a), limits the legal options available to a mortgage lender that forecloses on the property.
In a nutshell, it means that a mortgage lender can either foreclose on the property or sue for the outstanding balance, but not both.
In other words, the creditor cannot have its cake and eat it too.
A significant part of the “one-action rule” is what is called the “security first” aspect. This is a defense to be raised by the property owner to protect themselves from being sued on the mortgage debt.
The debtor can raise this defense to compel the mortgage lender in a foreclosure proceeding to first go after the “security”, the real property itself, instead of suing the debtor for the balance.
Coupled with the “one-action rule”, this system essentially allows homeowners to avoid being sued for outstanding debt in a foreclosure case, and limits the remedies available to the lender to only being able to retake the property.
There is a rare circumstance when the “one-action rule” does not apply. This is when the real property has been deemed legally worthless. The “one-action rule” and “security first” aspect both operate under the assumption that real property is always worth something, but the property may become legally worthless due to damage, neglect, or other factors.
California’s anti-deficiency statute is unique in that it encompasses a wide range of property types. It applies to a primary residence as well as a second or third home (provided the properties house 4 families or fewer).
Most significantly, California’s anti-deficiency statute even applies to timeshare interests purchased in California.
In a recent case, Glover v. SVC-West et. al., a California couple defaulted on loan payments for a timeshare purchased in Napa, leading the timeshare resort to freeze their account and forbid them from using their timeshare.
The Court granted the couple’s motion for summary judgment, ruling that Code of Civil Procedure Section 580b applies to timeshare interests in California, and to the financing loan offered by the timeshare company to the customers.