What is a deficiency?
A deficiency is the amount that remains unpaid on a mortgage after a foreclosure. This is the difference between the amount you owe to the bank and the amount they collected in the foreclosure.
What is a deficiency judgment?
A deficiency judgment is the amount of money awarded to the lender by a court for the amount remaining unpaid after a foreclosure. For example, if the mortgage balance is $750,000, but the fair market value of the home is $600,000, the deficiency at the time of foreclosure would be $150,000 and the bank could be awarded a deficiency judgment that can be collected by garnishing wages, seizing bank accounts or forcing the sale of other property owned by the borrower.
During the Great Depression of the 1930s, California enacted a number of anti-deficiency laws. These laws attempt to protect borrowers from deficiency judgments in certain situations.
The California Anti-Deficiency Laws
The California Anti-Deficiency Laws are found in the California Code of Civil Procedure (the “CCP”).
CCP 580b: No deficiency for purchase money loans on owner-occupied residences
The most powerful of the Anti-Deficiency Laws is CCP 580b. It prohibits deficiency judgments after the foreclosure of a “purchase money” loan. For our purposes, a purchase money loan is any loan that was used to purchase a residential property with one to four units, one of which is occupied in whole or in part by the borrower.
The protections of CCP 580b cannot be waived either at the time that the loan is made or later. DeBerard Properties, Ltd. v. Lim (1999) 20 Cal. 4th 659. Even junior loans (seconds) that were taken out at the same time as the senior loan and used to purchase the property will have the protections under CCP 580b. Brown v. Jensen (1953) 41 Cal. 2d 193, 197; Raub v. Lee (1960) 181 Cal.App.2d 529.
Even with this most powerful of the Anti-Deficiency Laws, the lender can sue the borrower for fraud in persuading the lender to make the loan in the first instance. Birman v. Loeb (1998) 64 Cal. App. 4th 502. Additonally, the lender can sue for any “bad faith” waste or damages to the property. Evans v. California Trailer Court, Inc. (1994) 28 Cal. App. 4th 540.
CCP 580d: No deficiency after a non-judicial foreclosure
A slightly less powerful law, CCP 580d, prohibits a lender from pursuing a deficiency judgment after that lender forecloses NON-JUDICIALLY on its own loan. Although, should that lender decide to pursue a JUDICIAL foreclosure, it could seek a deficiency judgment. Further, this law does not stop a junior lender who is wiped out by the senior lender’s foreclosure action from suing for a deficiency judgment.
CCP 580e: NO deficiency after a short sale
In the past few years, there has been a significant spike in the number of cooperative short sales completed in Southern California. In that process, the lenders agree to accept less than the full amount outstanding on their loan and release their lien so that the borrower may sell the property to a new buyer. The obvious questions were raised about how that deficiency could be handled by the lender and how or whether the anti-deficiency laws applied. The California legislature passed a series of bills that added Section 580e to the anti-deficiency laws which directly addressed this issue.
Under CCCP 580e, the lenders are prevented from seeking a deficiency judgment once those lenders have approved a short sale and collected the proceeds of that sale. Therefore, California short sales have full and complete protection from deficiency judgments. Nevertheless, borrowers seeking a short sale in California should be represented by an Attorney/Realtor® like Lawyers Realty Group to ensure that the second lender and other junior lien holders do not attempt to violate the law.
CCP 580e section (a)(1) provides that:
“No deficiency shall be owed or collected and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than four units in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the amount of the indebtedness outstanding at the time of the sale in accordance with the written consent of the holder of the deed of trust or mortgage, provided both of the following have occurred : (A) the title to the property has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located, and (B) the proceeds of the sale have been tendered to the mortgagee, beneficiary or the agent of the mortgagee or beneficiary in accordance with the parties’ agreement.”