If you fall behind in your mortgage payments, California’s “security first rule” says that your mortgage lender cannot sue you on the promissory note without first seeking a foreclosure. Read on to learn more about the security first rule, how it relates to California’s “one action” rule, and what happens in the case of a sold-out junior lienholder.
(For more articles on foreclosure in California, including programs to help homeowners avoid foreclosure, visit our California Foreclosure Law Center.)
In California, foreclosures can be either judicial or nonjudicial, though most residential foreclosures in the state are nonjudicial. (Learn more about whether your foreclosure will take place in our out of court.) Judicial foreclosures are administered though the state court system, while nonjudicial foreclosures have no court supervision and are handled by a trustee. (To learn more, visit Nolo's Judicial v. Nonjudicial Foreclosure page.)
Read more about the California foreclosure process.
To fully understand the security first rule, you must first understand California’s one action rule. California law permits a lender with a secured interest in real property (for example, the lender on your home mortgage) to take only one action. The one action rule states “There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” (Cal. Code Civ. Proc. § 726(a)). This means that a secured lender is only allowed to do one of the following:
From the face of the statute, the one action rule appears to allow the lender to sue the borrower personally based on the promissory note and forego foreclosure. However, courts have interpreted the rule to mean that a lender must go after the real estate first (Walker v. Community Bank, 10 Cal. 3d 729 (1974)). This is known as the “security first rule.”
The security first rule prevents a mortgage lender from ignoring the security (your home) and instead suing the borrower directly on the underlying promissory note. This means that the lender (whether its loan is a first mortgage, second, or HELOC) must first foreclose the property before it can try to go after the borrower personally (Cal. Code Civ. Proc. § 726(a)).
The security first rule generally prevents a mortgage lender from suing on the promissory note as the first method of collection. However, the security first rule does not prohibit a lender from suing directly on the debt when the security is legally worthless, such as in the case of a sold-out junior lienholder.
What is a sold-out junior lienholder? When a senior lienholder forecloses, any junior liens (these would be second mortgages, HELOCs, and the like) are foreclosed and those junior lienholders lose their security interest in the real estate.
If a junior lienholder has been sold out in this manner, that junior lienholder can sue the borrower personally on the promissory note.
Example. Say you borrow $500,000 to buy a home. This loan is secured by a first deed of trust (the senior lien). (Learn the difference between a mortgage and deed of trust.) You later borrow an additional $100,000 secured by a second deed of trust (the junior lien). You then fall on tough times and stop making payments on both loans. The senior lienholder forecloses and purchases the property at the foreclosure sale by making a credit bid consisting of the total amount due including all principal, interest, late charges, and trustee’s fees and costs. The property is conveyed free and clear of the junior lien after the foreclosure. In this scenario, the junior lien has no value. The junior lienholder can then sue you directly on the note to collect the balance of the loan as a sold-out lienholder.
On the other hand, if the junior lien secured a purchase-money loan (a loan that is used to buy the property), a refinance of a purchase-money loan (for example, a refinance of your original mortgage), or a seller-financed loan (a loan you take out from the person or entity selling the property to you), California law does not allow that lienholder to sue you for a personal judgment. (Learn more in Nolo's article Deficiency Judgments After Foreclosure in California.)
The exception to the security first rule for sold-out junior lienholders also does not apply if the lender itself has taken some action to make the security worthless. For example, if the same lender holds both the senior and junior loan, the lender cannot pursue a personal judgment against the borrower for the junior loan after foreclosing on the senior loan.
Find out more about California Foreclosure Laws and Procedures.