Mortgage Issues

The loan agreement for the purchase of real property consists of several separate yet integrated documents, including a promissory note, a deed of trust, and disclosure statements that satisfy the "Truth-in-Lending Act." The promissory note and deed of trust represent what is commonly called a “mortgage.”

A promissory note is simply a promise to pay. In simple terms, a deed of trust conveys to the lender the right to sell the security if the borrower fails to keep his promise to pay.

Deficiency. Recently, it has been more common for the secured loans to be greater than the value of the property. Where the security is sold for less than the amount of secured debt, a deficiency occurs. A deficiency is where the secured lender receives less than the full amount owed to it after a sale – either by the owner/borrower or by a foreclosure trustee. Only a court can issue a deficiency judgment.

Anti-Deficiency Statute. Under California Code of Civil Procedure Section 580b, a deficiency judgment is not available in the case of purchase money loans of owner-occupied residential property (four units or less). These loans are so-called "non-recourse" loans. If the mortgage is a non-recourse debt, the lender may look only to the security (the property), and the lender may not go after borrower's assets to recoup its losses.

Purchase Money Loan. A purchase money loan which meets section 580b is either a third-party purchase price loan or seller carry-back loan that is used by the buyer to pay all or part of the purchase price. The purchase money obligation must be for owner-occupied residential property and no more than 4 units.

Changing Non-Recourse Debt into Recourse Debt. Refinanced loans and home equity lines of credit obtained after purchase are not purchase money obligations. Accordingly, owner/borrower's who have refinanced may have lost the protection of section 580b and may be liable to a lender for any loss or deficiency.

One Action Rule. In California, there is a “one action rule” regarding foreclosures. Code of Civil Procedure section 580d. In other words, if a lender forecloses via a non-judicial foreclosure, that lender cannot also seek a judgment against the borrower for any deficiency.

If you have a question about your legal rights, or wish to speak to an attorney about your situation, please call us today at 510-663-9240, or contact us online to discuss your legal rights.