Several years ago I had written about how to determine whether or not your California real estate loan is a non-recourse loan, and if you lost the property, through foreclosure, would you have personal liability for the remainder of the debt. I did not discuss two other important considerations, even if you have a recourse loan- whether the lender will conduct a trustee’s sale rather than a judicial foreclosure, and whether or not the particular loan is a first or second loan. Homeowners and investors who have questions about their liability for their loans should consult with an experienced Sacramento and Yolo real estate attorney.
A. Is the lender likely to conduct a trustee’s sale?
There are two ways to foreclose on real estate in California:
1) by trustee’s sale, under the power of sale in the deed of trust, Civil Code section 2924 and 2932; or
2) by judicial foreclosure, a lawsuit to foreclose, Code of Civil Procedure section 726.
When a trustee’s sale is held, by private trustee, there will be no personal liability on the loan that was foreclosed. When a judicial foreclosure is conducted, there can be a deficiency judgment, resulting in personal liability for the remaining debt.
Judicial foreclosures are extremely rare for residential properties in California for several reasons. First is the time-consuming nature of a lawsuit. Second is the statutory right of redemption (CCP 729.010), which allows the borrower who had owned the property to redeem the property for one year after the sale by paying the total of:
(1) the purchase price at the sale;
(2) the amount of assessments or taxes, and reasonable sums for fire insurance premiums and maintenance expenses, paid by the purchaser;
(3) any amounts paid on account of senior liens to the extent necessary to protect the purchaser’s interest;
(4) any liens held by the purchaser that were junior to the lien foreclosed; and (5) interest on the above sums at the legal rate.
The right of redemption effectively ties up the property rendering it unmarketable for one year after the foreclosure sale. This benefits homeowners as lenders are reluctant to use judicial foreclosure vs. a trustee’s sale. If your loan is otherwise a recourse loan, and the lender conducts a trustee’s sale, there can not be any deficiency liability. Only with judicial foreclosure can a deficiency judgment be obtained.
B. Do you have Both a First and Second Loan?
If you have a second loan, and the first forecloses, then you have a sold-out junior. The second lender (even if it is the same entity or bank as the first)still has a debt owed, but no security. If the second loan was a recourse loan, you still have personal liability. The fact that the first conducted a trustee’s sale does not help you.