If a foreclosure was sold for less than owed, who is responsible for the difference?
12/11/2008 - Category:Real Property - Foreclosure - State: CA #14790
My son's house went into foreclosure and was a trustee sale, it was sold for 50% less than they paid -does this mean they are no longer responsible for any monies owing on this house. We are told in California once it is sold by trustee sale all monies owed on this property is wiped clear and final, they do have a document that says in part 'is to terminate any oral or written agreement you may have on said property'.
A trustee sale is a sale by a property in foreclosure due to default in the loan made from the lender, who holds a trustee deed on the property. A foreclosure sale can take place at public auction. The property may be sold to a third party bidder or revert back to the lender for a specified amount.
Foreclosure is the procedure by which a party who has loaned money secured by a mortgage or deed of trust on real property (or has an unpaid judgment), forces the sale of the real property to recover the money due, unpaid interest, plus the costs of foreclosure, after the debtor fails to make payment. There are different types of foreclosure, including foreclosure by judicial sale, which involves the sale of the mortgaged property done under the supervision of a court, with the proceeds going first to satisfy the mortgage, and then to satisfy other lien holders, and finally to the mortgagor. Judicial foreclosure is typically used when the amount due is greater than the equity value of the real property, and the lender wishes to get a deficiency judgment for the amount still due after sale. Foreclosure by power of sale, involves the sale of the property by the mortgage holder not through the supervision of a court when a power of sale clause is included in the mortgage. This type of foreclosure is often subject to judicial review at a later date due to issues about title that must be resolved by the court, including actual defects in the deed, and the priority of various lien holders and lessees on the property. In many jurisdictions the mortgage holder is prohibited from seeking a deficiency judgment if the holder chooses to sell the property through extra-judicial means. In many jurisdictions, a deed of trust is required in order to conduct a foreclosure by the power of sale. A voluntary foreclosure involves selling the home to the lender. Voluntary foreclosure may be pursued to minimize the damage to the debtor's credit record associated with involuntary foreclosure. In a voluntary foreclosure, the debtor may not be held liable if the home sells below the debt amount.
In many jurisdictions, a deed of trust is required in order to conduct a foreclosure by the power of sale. A deed of trust conveys the property from the mortgage holder to the trustee, who holds the property in trust for the mortgage holder. In the instance of foreclosure, the trustee, not the mortgage holder, conducts the sale of the mortgaged property. The trustee is generally instructed by the mortgage holder to foreclose on the mortgage and is under no obligation to determine whether this foreclosure is justified. A deed of trust and trustee supervised foreclosure allows the mortgage holder to bid for the foreclosed property, provided the trustee and the mortgage holder are not closely associated. Otherwise, a mortgage holder cannot bid for the mortgaged property when the foreclosure is by power of sale. A deed of trust is similar to a mortgage, with one important exception. If the borrower breaches the agreement to pay off the loan, the foreclosure process is typically much quicker and less complicated than the formal mortgage foreclosure process. While a mortgage involves a relationship between the borrower/homeowner and the bank/lender, a deed of trust involves the homeowner, the lender, and a title insurance company. The title insurance company holds legal title to the real estate until the loan is paid in full, at which time the title company transfers the property title to the homeowner.
When the foreclosure sale is not enough to satisfy the amount of the mortgage, under certain circumstances, the mortgage holder may bring a deficiency judgment against the mortgagor to make up the difference. If the purchaser fails to make the mortgage payment the property is foreclosed and title is obtained by the lender through a legal procedure. The property is then typically sold to pay the mortgage and a deficiency between the sale price and the outstanding balance of the mortgage usually exists. Some states have anti-deficiency laws which protect purchasers of residential real property used as primary residence. Under some anti-deficiency laws, if the mortgage is a purchase money mortgage for the purchase of a dwelling occupied by the purchaser, the purchaser will not be held responsible for any deficiency. The lender can only recover the property and the proceeds of a subsequent sale. The purchaser does not pay any deficit between the sale proceeds and the outstanding loan balance.
California's anti-deficiency law applies only to funds used to purchase a residence. The anti-deficiency law does not apply to additional financing such as second mortgages or home-equity loans. California requires foreclosure on real property trust deeds and mortgages instead of a suit on the note. No deficiency judgment is possible where the seller takes back a purchase money note and deed of trust as part of the sale financing. If a third-party lender finances the purchase, the third party cannot recover a deficiency judgment if that loan is given and used for paying all or part of the purchase price, is secured by the property purchased, is a property for use by no more than four people, and is owner occupied. A deficiency judgment is not available if the lender forecloses by private sale by trustee instead of a judicial foreclosure law suit. Federally made or guaranteed loans are generally not subject to the anti-deficiency laws of the state. V. A., FHA and Small Business Administration loans may subject the borrower to a deficiency judgment. A third-party refinance of a purchase money loan is not a purchase money loan and the buyer could be personally liable for payment of the seller's note after a judicial foreclosure.
The following is a California statute,
§ 580b Civ. Proc.
No deficiency judgment shall lie in any event 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, or 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, or 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 which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
Where 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 at any time 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.
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12/11/2008 - Category: Foreclosure - State: CA #14790
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