A deficiency judgment can be defined as the difference between the sales price and the loan balance in the event of a foreclosure or home sale. While there are some states that allow mortgage lenders to seek deficiency judgments in the case of a short sale, California’s anti deficiency laws prohibit lenders to sue a homeowner who has decided to perform a short sale. Also, the California Appeals Court had recently confirmed that anti deficiency provisions could not be waived in agreements made with lenders who strong-arm homeowners into signing away their legal rights.

This was affirmed in a recent lawsuit known as Coker v. J.P.Morgan Chase, decided by the 4th Appellate District court. The plaintiff of this case, Carol Coker, was suing J.P. Morgan Chase who had tried to hold the her liable for a deficiency judgment of $116,000. Due to the illegitimacy of the agreement, Coker had in fact been protected. Her protection stemmed from a section of California law that prohibits a deficiency judgment following a foreclosure on a purchase money loan. In the end, the court upheld that this same section of law protects short sellers.

The overall agreement that was approved by J.P. Morgan Chase included that the sale proceeds be paid to the lender and that the borrower be responsible for the deficiency balance. Chase then went after the borrower for the unsatisfied portion of the loan following the sale, she filed a suit against the them. This suit claimed that she was protected by state and common law. As we will show, the case used several California statutes to prove that the lender wrong.

In the end, Chase’s argument that the borrower waived the protection by agreeing as a condition of the sale to be liable for any deficiency after the sale was denied, due to the illegitimacy of their case. The end results actually proved that the lender’s actions made them give up their rights to claim a deficiency judgment.

California Civil Code Sections 580b and 580d (the “anti-deficiency judgment statutes”) prohibits the lender to obtain a “deficiency judgment.” Section 580d, states that “no judgment shall be rendered for any deficiency” upon a secured note after it has been sold.This year it was amended to protect homeowners further with Cal. Bill Analysis, S.B. 426 Sen. (April 23, 2013). Now anti-deficiency judgment laws prohibit not only the judicial pursuit of mortgage deficiency balances, but also that post-foreclosure deficiencies can never be “owed” nor “collected.”

The specific part of the California law known as CCP 580(b) was what the court upheld proving that short sale victims are given the same protections that foreclosure deficiency victims are given. This section also helped prove that when a lender makes a loan secured strictly by property bought as the debtor’s residence, the financial institution can only use the property itself to repay the loan. Thus once the property is sold in a short sale, any deficiency judgment existing cannot be billed.

It should be noted that the agreement the homeowner signed consenting to pay the balance was a predatory attempt by the lender to collect. In addition, California Code of Civil Procedure 580(d) dictates that any creditor who uses the power of sale in a deed of trust on real property forfeits the right to sue for any deficiency. As of 2011, CCP 580 (e) guarantees that mortgage lenders are prohibited from pursuing the seller for the balance if they consent to a short sale.

The overall significance of this case involved CCP 580(e). There is a group of homeowners who managed to short sale their underwater homes prior to the enactment of this statute, and their situations may benefit from this case.

Unfortunately, California sellers whose mortgage has been refinanced do not benefit from these anti deficiency laws.

Here is a copy of the amended California state law.

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. The Legislature finds and declares that this measure is not intended to and does not impact existing law regarding the liability a guarantor, pledgor or other surety may have with respect to a deficiency, nor does it impact existing law regarding other collateral pledged to secure an obligation that is the subject of a deficiency.

SEC. 2. Section 580b of the Code of Civil Procedure is amended to read:

580b. (a) Except as provided in subdivision (c), no deficiency shall be owed or collected, and no deficiency judgment shall lie, for any of the following:

(1) 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.

(2) 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.

(3) 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 that was used to pay all or part of the purchase price of that dwelling, occupied entirely or in part by the purchaser. For purposes of subdivision (b), a loan described in this paragraph is a “purchase money loan.”

(b) No deficiency shall be owed or collected, and no deficiency judgment shall lie, on a loan, refinance, or other credit transaction (collectively, a “credit transaction”) that is used to refinance a purchase money loan, or subsequent refinance of a purchase money loan, except to the extent that in a credit transaction the lender or creditor advances new principal (hereafter “new advance”) that is not applied to an obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction. A new credit transaction shall be deemed to be a purchase money loan except as to the principal amount of a new advance. For purposes of this section, any payment of principal shall be deemed to be applied first to the principal balance of the purchase money loan, and then to the principal balance of a new advance, and interest payments shall be applied to any interest due and owing. This subdivision applies only to credit transactions that are executed on or after January 1, 2013.

(c) The fact that no deficiency shall be owed or collected under the circumstances set forth in subdivisions (a) and (b) does not affect the liability that a guarantor, pledgor or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.

(d) When both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.

SEC. 3. Section 580d of the Code of Civil Procedure is amended to read:

580d. (a) Except as provided in subdivision (b), no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

(b) The fact that no deficiency shall be owed or collected under the circumstances set forth in subdivision (a) does not affect the liability that a guarantor, pledgor or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.

(c) This section does not apply to a deed of trust, mortgage, or other lien given to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code).

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.