One of the major concerns facing the millions of homeowners who are currently delinquent on their mortgage and "upside down" in value is that they fear not only losing their homes but also being subsequently pursued for a deficiency judgment.

Different states have different laws regarding foreclosure and deficiencies. Anyone who has the kind of concern noted above should verify those laws in their own particular state.

In California, the threat of a deficiency judgment -- which, technically, may be real – is frequently, for practical purposes, not a serious one. In some situations there is no threat at all. The discussion that follows here pertains to California law.

In the context of this discussion, a deficiency judgment is a judgment that may be entered by a court. Generally, it is the difference between the foreclosure sale price (the successful bid amount) and the amount of debt owed. In order to obtain a deficiency judgment, a lender must apply to the court for the judgment within three months of a judicial foreclosure sale.

In California, a major exception to the deficiency judgment rules is that no deficiency judgment is allowed when the loan is a purchase money loan for owner-occupied residential property from one to four units. Simply put, if the loan was made for the purchase of your home, no deficiency judgment is allowed.

Another major exception to the deficiency judgment rules is that no deficiency judgment can be obtained if the foreclosure is non-judicial. To understand this, we must note that there are two kinds of foreclosure available in California. One – the overwhelmingly most common – is a non-judicial foreclosure, also known as a trustee sale. A non-judicial foreclosure occurs when, pursuant to a deed of trust, the lender notifies the trustee that the borrower is delinquent. The trustee files a public notice of default. Then, in approximately three months, if the delinquency has not been cured, the trustee publishes a notice of sale. Approximately three weeks after that, if there is still no cure of the default, a trustee sale occurs. (At the discretion of the lender, this sale can be postponed.) This foreclosure sale is the "auction at the courthouse steps." There is no court action.

In a non-judicial foreclosure, when a trustee sale occurs, there is no deficiency judgment available. If the property sold for less than the loan amount, that is the lender's loss. There is no further recovery. (Two minor exceptions to this are: 1. if the loan had been obtained by fraud or 2. if the property had been intentionally damaged by the borrower.)

The other kind of foreclosure in California is a judicial foreclosure. This involves filing a lawsuit, to which the borrower may respond. Rather than taking the typical four to five months that a non-judicial foreclosure requires, this may take a year or more. Moreover, being a lawsuit, it can be costly. For reasons of time and money, then, lenders hardly ever file judicial foreclosures. It might make sense to do so in the context of a large commercial loan where a borrower might have significant assets worth pursuing. But it is hard to imagine many circumstances where it would be worthwhile to pursue a judicial foreclosure against a homeowner. Read More


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