California?s Anti-Deficiency Statutes Spell Relief for Many Borrowers

There are many things that people complain about when it comes to the State of California. Taxes, burdensome regulations, and the general cost of doing business are just a few. However, if you?re a homeowner, California may be your best friend, especially in these tough economic times where a major hurdle many people in the Golden State face is the steep decline in their home equity.
Unlike many states, California has what is known as an ?anti-deficiency? statute, which is an enacted law designed to protect borrowers from liability for loans where the loan was used to purchase their primary residence.

There are a few restrictions under the main anti-deficiency law. First, the home which the loan is secured against must be a primary residence of the borrower, meaning the residence which the borrower purchased as his or her primary home. In other words, funds used to purchase vacation homes, rental homes, or other investments, are not available for this protection. Second, the funds from the loan must be characterized as ?purchase money?, meaning the funds went directly to purchasing the home, or in few cases, improving the home. Third, the home must not be part of a dwelling which has more than 1-4 units.

California Code of Civil Procedure Section 580b is the anti-deficiency statute which pertains to purchase money loans. This section states in part:

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.

This type of loan is known as a ?non-recourse loan?, meaning the only recourse the lender has for the payback of the loan is against the property.

The anti-deficiency protection under Section 580b is available to the borrower whether the property is lost through a foreclosure or a deed in lieu of foreclosure, or transferred to a third party through a short sale.

Civil Code Section 580d is an anti-deficiency statute which protects many other borrowers where the lender proceeds to foreclose on the property and does so through a private, trustee sale, as opposed to a judicial foreclosure. For instance, where a borrower has a second loan on the property, commonly known as a HELOC (Home Equity Line of Credit), Section 580d may provide protection from a deficiency. In a private sale, the lender is enforcing a power of sale clause contained in the deed of trust. A judicial foreclosure process allows a lender to obtain a deficiency judgment against the borrower for non-purchase money loans. This route is much more expensive and takes much longer than a private, trustee sale.

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