- The lender forecloses under judicial proceedings (California Code Civil. Proc. § 726).
- In order to obtain a deficiency judgment, a lender must apply to the court for a deficiency judgment within three months of the judicial foreclosure sale. (CCP § 726(b).)
- If the second mortgage is hard money (refinance) and the lender has lost security for that loan through a foreclosure or short sale , making the security for the promissory note legally worthless (unsecured loan) , the beneficiary of that “sold out” junior loan can pursue a deficiency judgment (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).
Additionally SB 458 revised CCP § 580e to provide that:
- No deficiency shall be owed nor a deficiency judgment rendered following a short sale on a residential one-to-four unit property. (CCP § 580e(a))
- A lender may not require a borrower/seller as a condition to agreeing to a short sale to pay money other than from the proceeds of sale. (CCP § 580e(b))
Should a lender seek to collect in such a situation, it would additionally be a violation of the California Fair Debt Collection Practices Act (Civil Code § 1788).
Negotiating Collections
Some junior loan servicers are in the practice of heavily discounting and referring delinquent debt to a collections agency after a certain period of time. These companies are in the practice of purchasing “bad” debt at a discount, often pennies on the dollar, in an attempt to profit by collecting more money on the debt than they paid for it. Often times this can be a hurdle to closing even approved short sale as collection agencies can use aggressive negotiating tactics to attempt to get more proceeds from the sale over the amount the senior lien holder would allot .
For example lets say a collections agency buys $100,000 junior loan of bad debt for $0.10 on the dollar or $10,000. If the first trust deed in held by Fannie Mae, then the recently standardized guidelines will limit subordinate-lien payments to $6,000 or 6 percent of the unpaid balance, whichever is less. For the collections agency to be accommodating under such circumstances would come directly out of their bottom line. As such they have no incentive to agree to release the lien from the property for a short sale. They may wish to preserve the right to pursue the entire debt thus allowing no other alternative, but to let the house go into foreclosure. Depending on the circumstances, the only way to discharge the debt might be to file for bankruptcy. Included in this filing is an automatic stay, so that foreclosure can be halted.
For more information on short sale assistance or other alternatives to foreclosure, please see our short sale page and or contact us for free consultation.