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Mailbag with Julia – "What Happens To the 2nd Loan After Foreclosure if Both Loans are Owned By the Same Bank?"

March 11th, 2010 · 2 Comments · California Lending & Mortgage Law, Mailbag with Julia - California Real Estate & Lending Law Attorney


This week’s reader Dhillon writes: “To my understanding, under 580(d), if a junior lender uses non-judicial means to foreclose on the property, then he or she is barred from seeking a deficiency judgment (please correct me if this is wrong).

Now, suppose a homeowner obtained a non-recourse/purchase money loan from BANK X. Subsequently, the homeowner obtained a HELOC, also from Bank X. Next, the homeowner fails to make his payments on both loans. BANK X uses non-judicial means to sell the property at auction for defaulting on the non-recourse loan/purchase money.

Normally (at least I think), when you have a senior and junior lender, they are not the same party. In that situation, it would be unfair to bar the junior lender (promissory note) from seeking a deficiency judgment after the senior lender chooses to use non-judicial means to foreclose the property since he had no choice in the matter.

Also, 580(d) would be of no moment because the junior lender did not foreclose on the property, the trigger to 580(d). However, here, the junior and senior lender are the same party. BANK X triggered 580(b) when it foreclosed on the property on the basis of a default on the purchase money loan through non-judicial means. I think that much is clear.

"580(d) reads: No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter 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."

Now, did BANK X also trigger 580(d) with respect to the HELOC, barring any deficiency judgment on the second deed of trust, since, tracking the language of 580(d), it, BANK X, the trustee or mortgagee, sold the real property securing its loan through non-judicial means?"

Dear Dhillon – this is a common fact pattern because with real estate prices being so high in Santa Clara County, most purchasers did have to take a 2nd loan to buy the property (“purchase-money” or “piggyback” second) or the properties appreciated so steeply that many homeowners took out a Home Equity Line of Credit (HELOC) to remodel.

Let me rephrase your question because what it sounds like you are asking is, “If the 1st and the 2nd lender are the same bank, can that lender still go after you on the 2nd loan if the 1st forecloses?”

Essentially, does that “junior” lender retain its “sold-out junior lienholder” status if it the same bank?

Normally, when thinking about 580(d), you are correct, it is usually 2 different lenders. As I addressed in last week’s Mailbag with Julia entry, there is no “sale” on the 2nd loan and so the lender is still free to sell the note to a debt collection agency.

When the same lender has both loans against the same property and attempts to enforce the junior loan, the California Court of Appeals has said the Bank is NOT a sold-out junior and cannot pursue the borrower under the Note.

Tthe California Court of Appeals addressed this fact pattern in Simon v. Superior Court [4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 Cal.App. 1 Dist.,1992.] The actual lender there was Bank of America who held both the first and the second loans against the borrower’s property. The Simons apparently defaulted on their $1.575M worth of loans so BofA foreclosed (non-judicial sale) under the power of sale in the senior deed of trust.

The bank then sued the borrowers on the junior note.

The Court shot Bank of America down and said: “…we hold that, where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust's power of sale, thereby eliminating the security for its junior deed of trust, section 580d of the Code of Civil Procedure bars recovery of any “deficiency” balance due on the obligation the junior deed of trust secured.”

The Court went on further to explain the rationale: “As the holder of both the first and second liens, Bank was fully able to protect its secured position. It was not required to protect its junior lien from its own foreclosure of the senior lien by the investment of additional funds. Its position of dual lienholder eliminated any possibility that Bank, after foreclosure and sale of the liened property under its first lien, might end up with no interest in the secured property, the principal rationale of the court's decision in Roseleaf. (59 Cal.2d at p. 41, 27 Cal.Rptr. 873, 378 P.2d 97.)”

So there you have it. Two notes held by the same lender at the time of foreclosure? No deficiency arises from the bank’s own actions and the borrower is protected by 580D.

Here’s the twist – what happens if Chase has the 1st and later aquires the bank (Washington Mutual or World Savings Bank) holding the 2nd through a merger or sale?

Should the same rule apply? I would argue YES, the lender should be barred from seeking a deficience because the bank who acquires the 2nd still has the power to decide how they want to handle the foreclosure aspect.






2 Comments so far ↓

  • Evandtwins

    Would Bank X be able to credit bid BOTH loans at the Trustee Sale? If so, is that likely what the bank would do?

  • joan

    What would happen for the same lender owned both the 1st and 2nd TD and the 2nd TD were sold “at the last minute” to a debt collection company. I.e., sold before the 1st completed the foreclosure? It would seem that the court would see this as a contrivance to cimcumvent the Simon vs Superior Court finding (in favor of the debtor)

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