Jon Alan Enochs

Foreclosure

If you are a property owner and you owe more money to a lender that has your property as collateral to its loan then you have to concern yourself with deficiency liability. When you borrow money to purchase real estate usually that real estate property is pledged as collateral for the loan. Foreclosure is the process by which your lender essentially repossesses its collateral. Many property owners today that are facing foreclosure owe more money on their property than what the property is presently worth. The difference between the amount of money owed on the real estate loan and the value of the property is referred to as the deficiency balance (assuming the loan balance is greater than the fair market value). The general rule in California is that the property owner remains obligated to pay the deficiency balance after the property has been repossessed (foreclosed) and sold. There are exceptions to this general rule, but the property owner is every bit in a position where he or she is trying to find an exception to this rule. If the property owner cannot find an exception to this rule then the property owner is obligated to pay the deficiency balance owing to their lender. Now California has anti-deficiency laws that apply in narrow circumstances. And the applicability of these anti-deficiency statutes vary from property owner to property owner. The reason for the variance is two-fold; (1) Clients handle their financing and refinancing differently and (2) The character of the loans vary depending upon the use of the proceeds and the types of property being purchased. All of these variables come into play in determining whether the property owner will be ultimately responsible for having to pay the unpaid balance on their real estate secured loans. Some properties are commercial properties while others are residential. Some of these anti-deficiency protections apply only to residential loans.

The applicability of these anti-deficiency statutes becomes more complicated and convoluted when there are multiple loans encumbering a property. Ultimately, liability is determined on a per contract basis. If a property owner wants to know to what extent they are going to be obligated to pay on their loans encumbering their property after a foreclosure the property owner must look at each individual loan encumbering the property and find an exception to that general rule in having to pay the deficiency balance for each loan. Here again if the homeowner cannot find an exception then they will be obligated to pay on that loan. California’s anti-deficiency laws are most commonly found within California Code of Civil Procedures Sections 726, 580b, and 580d these Code of Civil Procedures can be found on the internet. However, I strongly encourage you to seek the assistance of an attorney with the experience handling secured land transactions rather than self-help. Once again the reason is these transactions normally involve multiple loans encumbering a property and there has been multiple refinancings taking place along the line. Determining the applicability of these anti-deficiency laws can and usually is quite challenging. Moreover, the amount in controversy is usually quite large. Most property owners do not have the financial wherewithal to absorb the consequences of a mistake in judgment in assessing their obligation to pay the deficiency balance.

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