In California, do I have to repay a second mortgage after foreclosure of the first?

Find out if second mortgage lenders can sue you after your first mortgage is foreclosed in California.

Question

I am losing my home through a nonjudicial foreclosure in California. I took out the first and second mortgage from the same lender when I bought the house. Both loans are still with this lender. The home is underwater and the equity won't even cover the first mortgage. After the foreclosure, will I still be liable to the lender for the remaining loan balances?

Answer

Whether or not a lender can come after a borrower for a deficiency judgment following a foreclosure in California depends on a variety of factors. Keep reading to find out whether the lender can get one in your situation.

California Foreclosures and Deficiency Judgments

Residential foreclosures in California are typically nonjudicial (though they can be judicial), which means the lender does not have to go through state court to foreclose. (To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)

Deficiency judgments are not permitted following a nonjudicial foreclosure. A lender can only sue a borrower for deficiency in a judicial foreclosure. Even with a judicial foreclosure, a deficiency judgment can't be obtained when the loan was:

  • used to purchase a one to four unit dwelling that is owner-occupied (a "purchase money loan")
  • a seller-financed loan (a loan you take out from the person or entity selling the property to you), or
  • a refinanced purchase money loan that was executed on or after January 1, 2013, except for new principal (that was not applied to the purchase-money loan), fees, and costs.

Consequently, most homeowners in California won’t face a deficiency judgment in a first mortgage foreclosure. (Learn more in Nolo's article Deficiency Judgments After Foreclosure in California.)

Sometimes a junior lienholder—such as a second mortgage lender—can sue you for the outstanding balance of its loan. If your property is underwater and you have a second or third mortgage, or a HELOC, you might face a lawsuit from one of those lenders after the first mortgage lender forecloses.

Second Mortgages, HELOCs, and Other Junior Lienholders

After the first mortgage lender forecloses, any junior liens (including a second mortgage lien) are also foreclosed and those junior lienholders lose their security interest in the real estate. Those lienholders are then called “sold-out junior lienholders.” Depending on the circumstances, these sold-out junior lienholder might be able to sue you personally on the promissory note to recover the outstanding balance of your debt.

For many years, California courts have followed a decision by the First District Court of Appeal (Simon v. Superior Court, 4 Cal.App.4th 63 (1992)). That decision said that if the lender that foreclosed the first mortgage is the same lender on the junior loan, that lender can't sue you personally on the promissory note for the junior loan after foreclosing the senior loan. But, in 2017, the U.S. Court of Appeals for the Fourth District disagreed with the holding in Simon, and held that California Code of Civil Procedure § 580d does not prevent a sold-out junior lienholder from seeking a deficiency judgment—even when the same lender holds both the senior and junior liens. (Black Sky Capital, LLC v. Cobb, 12 Cal.App.5th 887 (2017)). The California Supreme Court granted review of the Black Sky case but has not made a decision on the matter as of mid-2018.

Also, California law does not permit the lender to get a personal judgment against you if the loan was:

  • a purchase-money loan
  • a seller-financed loan, or
  • a refinance of a purchase-money loan

Talk to an Attorney

If you're facing a foreclosure in California and want to learn more about whether you'll have to repay a second mortgage after foreclosure of the first, consider talking to a foreclosure attorney.

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