If you owe $ 800,000 on a $ 550,000 house and you give the bank the $ 550,000 house, can the bank try to collect the difference of $ 250,000? Or, to use legal terminology, can the bank request a deficiency judgment?

The answer, in California, probably is not. California Code of Civil Procedure §580b states:

No judgment of deficiency will be established in any case after the sale of a property or an estate for years in the same due to failure of the buyer to complete his contract of sale, or under a deed of trust or mortgage granted to the seller to ensure payment of the balance of the purchase price of that property or equity for years in the same, or by virtue of a deed of trust or mortgage on a home for no more than four families delivered to a lender to guarantee the repayment of a loan that of The fact was used to pay all or part of the purchase price of that dwelling occupied, totally or partially, by the buyer.

In simple terms, this means that California is for most homeowners a no-recourse state when it comes to “mortgages to buy money.” These are mortgages, including in some cases second mortgages, that were contracted to buy a house in which the buyer actually lived.

California Anti-Deficiency Laws: Who Is Protected?

Therefore, three main groups of California mortgage debtors are excluded from the protection of the California Pro-Homeowner CPC 580b:

(1) Investors who bought houses to exchange without intending to live or rent in them

(2) investors buying a rental property

(3) homeowners who incur additional mortgage debt after purchasing their home.

California also has a second law that protects mortgages from its banks: CCP 580d. This law covers all home debt, including HELOCs, home improvement loans, and second mortgages, but the law only applies to non-judicial foreclosures. These creditors can still collect the remaining debt in a judicial foreclosure.

Laws against deficiency in practice: an example

Here is a scenario showing how 580b and 580d work together:

Bob bought a house with a $ 0 down payment and a 500,000 interest mortgage. After the value of his house went up, he got a second mortgage, on which he owes 100K. Now your house is worth 400K and you have 600K of mortgage debt.

Let’s say Bob stops paying and his house is foreclosed and sold for 400K. That leaves 200K in debt unpaid. The first lender receives all 400K, but cannot get the remaining 100K that Bob owes.

The second lender now has a choice. You can simply eat your entire 100K loss, or you can go the route of a judicial foreclosure. The bank probably won’t do that if Bob has few assets and a lot of debt, but if Bob has a high-paying steady job, the lender might give it a try: $ 100,000 is a lot of money to lose.

In these circumstances, Bob’s best strategy is probably to stop paying the first mortgage but keep paying the second. There are many complicated rules and strict time limits associated with a judicial foreclosure. If Bob continues to pay Lender 2 while he defaults on Lender 1 and waits for Lender 1 to foreclose, the chance that Lender 2 will pick up on it and go through the complicated judicial foreclosure process on time is less than if Bob imposed on both lenders at the same time. Additionally, the amount owed to Lender 2 will decrease as payments continue to be made, so the value of requesting a deficiency judgment decreases.

Better to talk to a lawyer first

For someone considering dropping their mortgage but wanting to protect their income and other assets from their banks, it would be best if they seek the help of a licensed California attorney who can advise on a number of issues, such as:

– Can the bank use some other legal means to impose its loss on the former owner, for example, under a theory of equity or tort? Assuming the bank tries, do you have any chance of winning?

– Does 580b protect a homeowner who bought a condo as an investment and rented it for a year, then moved out, and then stopped paying the mortgage?

– What are the state and federal income tax consequences of a foreclosure?

Attorneys are not cheap, but all mortgage companies have their own army of attorneys and collection staff. Would you really want to go solo against them?