Generally, in California a purchase money mortgage loan(s) (i.e. the loan, or loans to include 2nd loans, which are obtained to purchase the property) are non-recourse obligations. If all the loan(s) secured by the home being foreclosed were Purchase Money Loans then the borrower will not have any remaining obligations to any of the purchase money lenders, regardless of which lender foreclosed. If a lender attempts to seek payment of a remaining balance for a purchase money loan secured by a residence that was foreclosed then immediately notify the lender in writing that the loan in question was a purchase money loan and as a result non-recourse. A purchase money lender only has one method foreclosure option. NOTE- A purchase money loan is non-recourse but a lender may attempt to recover in the event that the loan was obtained through false pretenses, fraudulent application, deceit, etc
THE NON- PURCHASE MONEY LOAN 1ST (i.e. the 1st Loan was Refinanced)
As is the case in many circumstances, borrower/owners refinance the 1st loan for a variety of reason (lower interest rates, change in term, cash-out, etc.). Once a refinance occurs, the new loan is a recourse obligation loan and depending on how a lender forecloses can cause the borrower to continue owing money to the lender.
THE NON-JUDICIAL FORECLOSURE PROCESS (Common and Extinguishes the Foreclosing Lender's Right to Recover Deficiency)
In California a non-purchase money lender has option to foreclose in one of two ways Judicial, or Non-Judicial. If, however, the loan is a purchase money loan then this is the only method. Regardless of the type of loan - THIS IS THE MOST COMMON METHOD.
Non-Judicial Foreclosure -- takes approximately 120 days from the a Notice of Default is recorded (the "NOD" commences the foreclosure process). If the lender uses this method then regardless of what is owed on the property, the lender cannot obtain recovery of the deficiency from the borrower.
Example- if a borrower owes $300k on a non-purchase money 1st , the lender forecloses and the property sells for $200k at the foreclosure auction then the remaining balance is wiped out. The lender CAN'T recover from the foreclosed owner.
Note- if you hborrowers purchase money2nd loan forecloses and the 1st loan is also a purchase money loan then the borrowers obligations terminate as to both lenders.
THE JUDICIAL FORECLOSURE PROCESS (Uncommon and May Provide Lenders with a Recovery of Deficiency)
Judicial Foreclosure -- Uncommon, can take a year or longer to finalize, and may provide the lender some recovery of the deficiency.
Example -- Step 3 example, but judicial foreclosure. Following foreclosure, foreclosing lender would have to request a hearing from the court and present evidence to establish that the property was in fact worth more than what it sold for at the foreclosure auction, the court must agree and issue a ruling establishing the "fair value" of the foreclosed property, and if the foreclosure sale generated less than the "fair value" then the lender can seek to recover the remaining deficiency with a cap at the lesser of the fair value amount determined by the court or the unpaid balance.
Most lenders want to expedite the foreclosure process and minimize losses. As a result, the general rule is that lenders will utilize the Non-Judicial process to efficiently recover the property, minimize expense and perhaps sell the property to a new buyer
THE CASH-OUT 2nd, HELOC, 3rd LOANS, etc.
By definition, these loans are recourse obligations (and non-purchase money). If the 1st lender forecloses on the borrowers home then these loans survive the foreclosure and become unsecured installment loans. As a result, 2nd, 3rd, HELOC loan lenders rarely foreclose on borrower unless there is sufficient in the home to pay off the first and whatever remains goes the the 2nd, and if their is a 3rd then the remainder trickles down to the 3rd lender, and if there is any sum remaining then it would go to the foreclosed owner. To be clear, if there is no equity in the property and the fair market value of the home is less than the amount owed on the 1st loan, a 2nd loan lender, or other junior secured lenders, would not foreclose otherwise they would lose their right to ever recover the deficiency from the original borrower.
This guide provides general understanding of legal principles. It should not be relied upon as legal advice but as a guide to better understanding the subject matter of the guide. For help with your specific issue, matter and/or case communicate directly with a lawyer to obtain fact specific legal counseling and guidance.
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