Anti-Deficiency Statutes
© 1999 By Barbara J. Savery, Attorney-at-Law
The Castleman Law
Firm
A Professional Corporation
5870 Stoneridge Mall Road, Ste. 207
Pleasanton, CA
94588
(925) 463-2221
Fax (925) 463-0328
A little known set of statutes offers buyers of real property in California big protection. These statutes were passed during the Depression, and were intended to protect buyers from personal liability if they defaulted and the lender foreclosed on property that had dropped in value. Here's how they work: if a borrower doesn't make his payments and the loan is secured against the property by a recorded deed of trust, the lender has the right to foreclose and take the property away from the buyer. Prior to the Depression, the lender would then determine whether the value of the property was equal to the loan balance. If it wasn't, the lender would turn around and sue the borrower for the difference. So many people were forced into poverty because of these "deficiency" lawsuits that the California legislature rebelled and passed the anti-deficiency statutes to prevent lenders from suing borrowers who had already lost their homes.
The legislature was primarily interested in protecting homeowners. Therefore, the anti-deficiency statutes don't protect all borrowers. However, if a person borrows money to buy residential property of four or fewer units and lives in it; if the seller carries back a purchase money loan on either residential or commercial property; or if the lender forecloses under the deed of trust (as opposed to filing a formal lawsuit to foreclose), then he cannot sue the borrower for any deficiency.
In the late 1980's, many borrowers simply walked away from real property they had purchased and stopped paying their loans. They did so because they found that, with plummeting real estate prices, they owed more than the properties were worth. They were not personally liable for any unpaid loan balance that remained due after the lender foreclosed, and went on to start their lives anew. Lenders dislike the anti-deficiency statutes, but the legislature has consistently refused to repeal them, and the California Supreme Court recently reaffirmed their importance.
© 1999 By Barbara J. Savery, Attorney-at-Law. All rights reserved