Bloomberg ran a great piece today on lenders pursuing borrowers for deficiency judgements after foreclosure of their homes. While several states are recourse states, California is non-recourse for purchase money mortgages. In other words, if the borrower defaults on the loan used to buy the home, the lender is left with only the collateral, regardless of whether it covers the loss on the loan. Many other states do not afford borrowers this privelege.
All this is out the window, however, if the borrower refinanced or put on a second mortgage. In these instances, the lender has recourse, and can pursue a judicial foreclosure, as opposed to a trustee’s sale, and seek a deficiency judgment. Should this happen, remember that California is a “single action state,” meaning that the lender can either pursue a trustee’s sale, or pursue a judicial foreclosure and seek a deficiency judgement, but not both. Finally, for short sales, I encourage sellers to consult with legal counsel and ensure that the lender waives its right to a deficiency judgment. This should be a point of negotiation in the transaction.