Deficiency Judgments After Foreclosure or Short Sale

What You Need to Know Craig Triance, JD THE LIFEBOAT GROUP, INC.

Executive Summary
For purchase money mortgages; nothing to worry about. y For refinance and HELOC mortgages, a one-way ticket to a Latin American country without an extradition treaty works wonders.
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California Law
Anti-deficiency Statute: CCP 580a-f y Prohibits Deficiency Judgments for purchase money mortgages if using nonjudicial foreclosure CCP 580b
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This applies to all California Property

Whether commercial or residential. y Its the financing, not the property that controls.
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Exception Judicial Foreclosure

If the lender elects a judicial foreclosure, a court proceeding, a deficiency judgment is permitted. y Long Expensive Process must have lots of assets to y Make it y Worth it.
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New California Rules

Senate Bill 931, effective January 1, 2011 y First Trust Deeds do not have deficiency judgment rights, whether y In foreclosure or short y Sale. y Applies only to y Residential property
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What about Seconds?

Not covered by new Rule y Chance of a deficiency judgment exists, especially if a HELOC or cash out refi.
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What is a Purchase Money Loan?

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A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs.

What about Refinances?

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If you got money out it is not a purchase money loan.

What that Means:

Prior to January 1, 2011, it was ok for the lender to go after you if a first trust deed; now it is not. y It is still OK for lender to go after you for a second trust deed.
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Going after the borrowers

Done on a borrower by borrower basis. y Wells Fargo is currently waiving deficiencies. y Bank of America and Chase are not. y They have 4 years; not 3 months, to do this. The 3 mos claim is a legal mistake.
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What is a Deficiency?
It is an unsecured transaction, like a credit card. y It is not a priority y or a secured debt y For bankruptcy or y Collections reasons
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What about Purchase Money Seconds

REAL GRAY AREA y No statutory control
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Here are some hints

If a loan is modified or changed, and it started life as a purchase money loan, it remains a purchase money loan and there is no deficiency y Costanzo vs. Gangley 12 Cal.App.4th 1085 (1993)
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More Hints
If the lender is the same bank for the first and the second, and they were issued at the same time, the loans have merged and there is no deficiency. y Simon vs. Superior Court 4 Cal.App.4th 63 (1992)
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Still More Hints

An agreement to waive the anti-deficiency provision as a condition for issuing financing, is invalid, either before or after the financing takes place. y Commonwealth Mortgage Assurance vs. Superior Court 211 Cal.App.3d 508 (1989) y Palm vs. Schilling 191 Cal.App.3d 63 (1988)
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Short Sale Negotiations

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Evil Vampire Squid wont waive deficiency on purchase money second, Palm should protect you.

Suggested Language for Seconds

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Borrowers execution of the Short Sale Approval letter dated ______ between (name of evil servicing company) and Borrower does not constitute a waiver of Borrowers rights under the antideficiency statutes of the State of California, for purchase money mortgages as provided by Code of Civil Procedure Section 580 et.seq.

Recommendations to Client
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If the second is a purchase money second and the bank comes after them for a deficiency fight the law is on your side.

If the second is a HELOC or a Refinance

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If their financial condition is already screwed: