California has some pretty cool laws to protect homeowners. You should become very familiar with the CA Civil Code of Procedures, Sections 726(a), 726(e) and 580(d).
To start, the most misunderstood and misquoted part of CA anti-deficiency laws is Section 580(d). People assume that the only requirement to be protected from deficiency is that they occupy the home. The second qualification is that the lien in question also be a 'purchase money' loan. This means it was the actual financing used to acquire the property. So, if I do a rate and term refinance a day after I buy the home, even though I didn't take any money out, I am not longer protected under Section 580(d).
...but all is not lost if this homeowner unknowingly took a recourse loan. You see, we also have Section 726(a) which applies to the recourse options for lenders with regards to 1-4 unit residential real estate. This law states that a lender can only choose one course of action for recovering money from a defaulted loan- 1) foreclose judicially and therefore obtain a judgment for the balance that is lost or 2) foreclose using the power of sale clause by way of a Trustee Sale. So, let's say that I have a 4 unit rental which I have refinanced and from which I have taken out $200K in equity above what I purchased it for. The lender has only one of two options if I stop making payments. If they opt to foreclosure via Trustee Sale, they can never ever come back after me for their loss, no matter how great (unless there was fraud or I intentionally damaged the property). If they choose the more expensive and lengthy process of a judicial foreclosure, they can obtain a judgment against me.
However, even though this has been the case for decades, CA legislators were forced to pass a law to reflect this 'one action rule' when it comes to short sales, because thousands of homeowners were harmed by ignorant agents who did not know that they were asking their client to open themselves up to MORE liability by accepting a short sale without a full release of liability from the first lien holder. This law, which was passed as SB 931, is now written in the Civil Code under Section 726(e). As of the beginning of 2011, all first lien holders who approve of a short sale can NOT collect on the deficiency balance.
Sounds simple enough... but what about second the second mortgage? If the first lender forecloses and there is a second lien, they have a right to pursue 'one action' as they did not take an action in the foreclosure process, only the first lien did (unless of course, it is one of those rare cases where a second lien does foreclose). So this means that unless protected under Section 580(d), most junior liens can collect on their loan balance after foreclosure. This means they have up to 4 years to obtain a judgment, if they so chose. If they don't obtain a judgment within 4 years (the statute of limitations in CA),they may still try and collect on the balance, but they can not do so by way of a judgment.
Now, the final 'unique' situation. In 1992 there was a civil case, Simon vs. Superior Court, where it was determined and is now used as precedent case law, that if the first and second lender are held (this is vague whether this means serviced or owned) by the same bank, they only have one action between the two liens. This was a clarifying ruling on Section 726(a) so that it was understood that the 'one-action' rule applies as one action per LENDER per property not one action per LIEN.
I use this knowledge to get a full release of liability without a cash contribution or an unsecured note over >90% of the time. I don't believe in making my client pay when the bank will give in when push comes to shove. In CA, for 90% of the short sales you do, you should get a full release of liability for your seller. There are a few cases, such as strategic default, where I can't always justify that the bank give in without any contribution. Call me for a free and confidential consultation (650) 533-3526. |
