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?
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.
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. (Cal. Code Civ. Proc. § 580d). However, a lender can sue a borrower for a deficiency in a judicial foreclosure. Even with a judicial foreclosure, though, a deficiency judgment can't be obtained when the loan was:
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.)
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.
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.” These sold-out junior lienholders might 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 and, in May 2019, decided that when a lender holds two deeds of trust on the same property, that lender may seek a deficiency judgment on the extinguished junior lien under limited circumstances. (To learn more, read California Supreme Court Decision Changes State’s Deficiency Law.)
Also, keep in mind, California law does not permit the lender to get a personal judgment against you if the loan was (as described above):
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.