California has several laws that limit what a mortgage lender can do to collect its money after the foreclosure. I was reminded of the purchase money antideficiency statute yesterday when meeting with a client who took out two loans to buy a home. The home was now in foreclosure.
California Code of Civil Procedure 580(b) provides that a lender may not sue a borrower after a foreclosure sale when the loan was used to acquire a home. This Depression-era statute puts the risk of non payment solely on the lender who made the loan to buy the property. The lender’s sole remedy is to foreclose on its deed of trust.
Contrast these facts to a loan taken out by a borrower for other purposes, such as remodeling, business, or payment of other bills. Such a loan doesn’t fall within the anti deficiency provision because it wasn’t used to acquire the home. A holder of a second deed of trust on a HELOC, for example, has the right to sue the borrower should a foreclosure by the senior mortgage lender cut off its interest in the collateral. Facing those facts, perhaps bankruptcy is the right choice.
For yesterday’s client, the fact that both loans on the troubled property were taken out to buy the house protects the borrower from any future collection action by either lender. This client didn’t need bankruptcy protection. They’ll be survivors of the mortgage meltdown.