One good question asked by many homeowners during a bankruptcy consultation at my Offices in Sacramento, Stockton, and Fairfield, California: "Can a mortgage lender sue me for the balance of the loan after a foreclosure?" This question is common to any experienced Sacramento bankruptcy attorney.
To answer this question, first I need to explain an important anti-deficiency statue in California called CCP 726(a), which has two components the "one action rule" and the "security first rule".
It does not matter whether you live east of Roseville and Rocklin, west of Woodland and Yuba City, south of Tracy and Modesto, or north of Benicia and Vallejo, CA, CCP 726(a) applies to all real estate in the state of California.
What does the "One Action Rule" mean?
This California statute restricts mortgage lender to only one action for the recovery of the loan balance to only one the following actions: (1) nonjudicial foreclosure (aka trustee's sale), (2) judicial foreclosure, or (3) sue the borrower personally on the promissory note for the balance of the mortgage loan. However, in a California court case (Walker v. Community Bank), the mortgage lender must resort to "security first" before suing the borrower for the deficiency of the loan.
What does the "Security First Rule" mean?
The mortgage lender must foreclose on the real estate first before suing the borrower for the deficiency of the loan (aka obtaining a deficiency judgment). However, there is another California law that protects borrower further against a deficiency judgment on a mortgage taken out to purchase his or her residence. This rule assumes that the borrower did not refinance the loan and that the home continues to be his or her residence at the time of foreclosure. That is, the borrower did not turn his or her house into rental property.
However, if the borrower obtain a second mortgage or home equity line of credit with a different lender and after purchasing the home, that loan is not a purchase money loan and the different lender of the second mortgage or home equity line of credit is not barred from pursuing s deficiency judgment after the real estate is foreclosed by the other lender of the first mortgage.
Can a lender for the Second Mortgage or Home Equity Line of Credit pursue a Deficiency Judgment after the lender of the First Mortgage Foreclosed?
Yes, the lender of the second mortgage or home equity line of credit can sue the borrower for the deficiency on the loan because it has not had its "one action" yet and it is not limited to the "security first rule" since the real estate was already foreclosed by the lender of the first mortgage.
See the next Bankruptcy Attorney Blog for a discussion about the difference between a Judicial and Nonjudicial Foreclosure and whether deficiency judgment is limited under the two types of foreclosure in California.