If a home sells at a foreclosure sale for less than the borrower owes on the loan, the difference between the mortgage debt and the foreclosure sale price is called a "deficiency balance." For example, suppose Calvin owes the bank $800,000, but his home sells at a foreclosure sale for only $775,000. The deficiency balance is $25,000.
Some states permit the foreclosing bank to get a personal judgment—called a “deficiency judgment”—against a borrower for the deficiency balance. Fortunately, most California homeowners won't have to pay a deficiency judgment after going through a foreclosure.
How Does the California Foreclosure Process Work?
California foreclosures can be judicial or nonjudicial. Judicial foreclosures go through the state courts. Nonjudicial foreclosures, however, happen outside of the court system. In California, foreclosures are typically nonjudicial. Either way, the process ends when the property is sold at a foreclosure sale.
At the sale, the lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales. Once again, the difference between the total debt and a lesser winning bid at the sale is the deficiency.
However, if the sale price equals (or exceeds) the mortgage debt amount, there's no deficiency. If the sale results in excess proceeds, you might be entitled to that extra money after the foreclosure auction.
What Is a Deficiency Judgment?
Again, in some states, the foreclosing bank can get a personal judgment (a “deficiency judgment”) against a borrower for the deficiency balance after a foreclosure. The bank may then employ typical collection methods, like a wage garnishment or a bank account levy, to collect the outstanding deficiency balance from the borrower.
Are Deficiency Judgments Allowed in California?
Generally, California law permits a deficiency judgment after a judicial foreclosure but not after a nonjudicial foreclosure.
Deficiency Judgments and California Nonjudicial Foreclosures
California law prohibits a bank from getting a deficiency judgment following a nonjudicial foreclosure. (Cal. Code Civ. Proc. § 580d).
Because foreclosures are usually nonjudicial in California, most people going through foreclosure in that state don't have to worry about owing a deficiency judgment.
Deficiency Judgments and California Judicial Foreclosures
However, if the bank opts to use a judicial process, California law generally allows a deficiency judgment. To get the deficiency judgment, the bank has to file an application with the court within three months after the foreclosure sale.
The judge then holds a fair value hearing to determine the fair value of the property. The deficiency judgment is then limited to the lesser of:
- the difference between the total debt and the fair value of the property at the time of the foreclosure sale or
- the difference between the total debt and the foreclosure sale price. (Cal. Code Civ. Proc. § 726(b)).
But even in cases where the bank decides to foreclose through the court, a deficiency judgment isn't allowed when the loan was:
- used to buy a one- to four-unit dwelling that is owner-occupied (a "purchase-money loan")
- seller-financed, or
- a refinanced purchase-money loan executed on or after January 1, 2013, except to the extent that new principal was advanced. (Fees, costs, or related expenses of the refinance are also not covered by this anti-deficiency law.) (Cal. Code Civ. Proc. § 580b).
Second Mortgages, Home Equity Loans, and HELOCs
When a senior lienholder forecloses, any junior liens (like second mortgages and HELOCs, among others) are also foreclosed, and those junior lienholders lose their security interest in the real estate. This is referred to as a “sold-out junior lienholder.” If you have more than one mortgage on your home and the first mortgage holder forecloses, you might face a lawsuit from one of those sold-out lienholders.
For years, courts have followed a decision by the First District Court of Appeal, Simon v. Superior Court, 4 Cal. App. 4th 63 (1992), which said that if the bank or mortgage company that foreclosed the first mortgage also holds the junior loan, that entity can't sue the borrower personally on the promissory note for the junior loan after foreclosing the senior loan.
However, in 2017, the U.S. Court of Appeals for the Fourth District disagreed with the holding in Simon and held that California Code of Civil Procedure § 580d doesn't prevent a sold-out junior lienholder from seeking a deficiency judgment—even when the same entity holds both the senior and junior liens. (Black Sky Capital, LLC v. Cobb, 12 Cal. App. 5th 887 (2017)).
The California Supreme Court granted review of the Black Sky case and decided that when a bank or mortgage company holds two deeds of trust on the same property, the holder may seek a deficiency judgment on the extinguished junior lien under limited circ*mstances.
Get in Touch With an Attorney
If you’re a California homeowner facing a foreclosure and want to learn whether you might face a deficiency judgment after a foreclosure, if you have any defenses to the action, or want to find out about different ways to avoid a foreclosure, consider talking to an attorney.
A HUD-approved housing counselor can tell you about foreclosure avoidance options if you can't afford an attorney.
