My house foreclosed four years ago. I had a first and second mortgage with the same lender. The house went back to the bank and was sold. All this time has gone by and today I got a debt collection letter for the second mortgage. Can they do this? I thought if one lender held both mortgages and they took back their property they would not come after you. If so, how long are they allowed to do this? This is the first correspondence I've received since the house went into default four years ago.
Proceed with caution - first, you are correct that there is Ca case law that provides that when a first trust deed lender forecloses on a home and there is a second sold out junior mortgage held by the same lending institution, the sold out junior cannot sue the defaulting borrower personally for the deficient amount under the promissory note.
Also, the fact that the foreclosure occurred roughly four years ago means that you may have a statute of limitations defense - need to know the exact dates.
Regardless, you should in no way pay, affirm or accept liability for the amount allegedly owed before you discuss this matter with an attorney that can review your case file.
Was the second a home equity loan? If not, it seems from your recitation of the facts that the second was a "purchase money" loan and California's anti-deficiency law probably applies.
During the era of subprime home loans, the “80/20 loans”, which essentially provided for 100 percent financing, allowed home buyers with all types of credit avoid PMI (private mortgage insurance). As a consequence, foreclosures involving 80/20 loans in California often result in confusion on the part of the borrower.
Suppose the lender of the first deed of trust forecloses. What happens with respect to the second deed of trust? In most instances, the second lender can pursue a deficiency judgment if the second lost security for that loan after the first foreclosure.
The only limited exception is if the borrower obtained the 80/20 loan from the same lender at the same time to initially purchase the house, AND never refinanced either loan with a different lender, AND used 100% of the 80/20 loan proceeds to initially purchase the house, then the second loan is considered a "purchase money" loan, and California's anti-deficiency law should apply.
Foreclosures of 80/20 loans are extremely fact-intensive inquiries so if you have a question about potential liability in regard to your 80/20 loan, you should contact a foreclosure or real estate lawyer.
The mere fact that the same lender funded both the 1st and 2nd mortgages used to purchase the home does not make the 2nd loan uncollectable if the 1st TD holder forecloses. The anti deficiency statute of CCP 580b applies only sellers who carried back part of the purchase price in the form of a note secured by a deed of trust.
There is some confusion as to whether a 2nd TD holder who funded a purchase mortgage (i.e., 80/20 or 90/10/10 loans) may pursue a deficiency judgment after foreclosure by a senior (1st TD) lienholder.
A second TD lender - not the seller of the property, but a third party lender - who does not foreclose on the 2nd but whose security interest (deed of trust) is "wiped out" by the foreclosing 1st TD lienholder, retains an enforceable note and may file a lawsuit to to enforce the note. But, if the second TD lienholder is the seller of the property (or asignee) who took back a note and TD as part of the purchase price, suffers a loss as a result of the senior lienholder (1TD) foreclosing, that junior lienholder cannot enforce the note.
Under California law, there can be no judgment for any deficiency upon a note secured by a deed of trust secured by real property in which the real property has been sold by the trustee under power of sale contained in the deed of trust (non judicial foreclosure). Code Civil Procedure §§ 580d.
But where a junior lein holder is "sold out" by a senior lienholder's foreclosure, the prohibition against a deficiency judgment or residual action to enforce the note applies only to vendors - sellers - of the secured real property who carried back financing as part of the purchase price.
Code Civl Procedure §§ 580b states: No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
Section 580b was designed to prevent overvaluation by placing the risk of inadequate security on the purchase money mortgagee (seller) and to prevent aggravation of a depression in land values by not burdening purchasers with the loss of property plus personal liability. A purchase money creditor (seller) assumes the risk that the property may be worth less than the total encumbrances. Palm v. Schilling (Cal.App. 4 Dist.,1988) 199 Cal.App.3d 63, 71.
California statute precludes a deficiency judgment on a purchase money note in favor of the vendor (seller). In re Prestige Ltd. Partnership-Concord, C.A.9 (Cal.)2000, 234 F.3d 1108
On the other hand, if a junior lien is not a seller carry-back purchase money loan, and that junior lien is wiped out by a senior lien holder’s foreclosure, the “sold out” junior lien holder may proceed for a deficiency judgment. (See Lange v. Aver (App. 1 Dist. 1966) 50 Cal.Rptr. 847; and see In re Marriage of Oropallo (Cal.App. 2 Dist.,1998) 68 Cal.App.4th 997)
Richard A. Rodgers, Esq.
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