The purpose of the Fair Value Hearing is to determine the deficiency value in which the lender can obtain a deficiency judgment against the borrower. The deficiency value will be the difference between the outstanding principal balance of the loan at time of the judicial foreclosure and the amount paid by the highest bidder at sale. If there were no bidders, then the deficiency value is the difference between the fair value of the mortgaged property and the deficient amount owed to the lender. Subsequent to the fair value hearing, the court will enter a deficiency value against the borrower and any other applicable person, such as the guarantor. The deficiency judgment may be enforced like any other judgment. Additionally, California Civil Code § 580(a) requires a junior lien holder, who purchased the senior lien-holder’s foreclosure sale, must hold a fair value hearing within three (3) months from the date of purchase. Failing to do so will bar the junior lien-holder from obtaining a deficiency judgment.

Section 580(b) of the California Civil Code specifically protects Borrowers and Guarantors who obtained purchased-money loans. First, under the vendor’s rule, a seller is barred from seeking a deficiency judgment if the Borrower signs a promissory note and the seller carries back a “Trust in Deed” (TID) that is secured by the property sold. Second, under the Lender’s rule, a Lender is barred from seeking deficiency judgment if the Borrower signs a promissory note, secured by the TID on the property sold, the Borrower occupied in whole or in part of that property, and the property is a residential property with 4 units or less. However, the Court held under Spangler vs. Memel that a standard purchased-money loan that is subordinated to a construction loan loses its purchased money characteristic, and both the Vendor and Lender under § 580(b) may obtain a deficiency. As stated, Section 580(d) bars a Lender from seeking deficiency judgment after a non-judicial foreclosure. Lastly, under DeBernard, a Borrower cannot agree to a “deed in lieu of foreclosure.” That is, the Borrower cannot waive anti-deficiency at the time of contract.

Anti-deficiency legislation prohibits the Lender from seeking a deficiency from a Guarantor after a non-judicial foreclosure, § 580(d), unless the Lender gives the guarantor notice in what is known as a “Mariner’s Letter”. A Lender may not impair the rights of the Guarantor by non-judicially foreclosing on the property without notice of intent to foreclose. The California Civil Code requires that the guarantor must first be notified so that, at the guarantor’s option, he/she may choose to bring the defaulting loan current or pay off the loan. By non-judicially foreclosing the property without notice to the Guarantor, the Lender impairs the guarantor’s ability to obtain any debt from the Borrower.

Furthermore, under § 726(f), if the Borrower committed fraud by misrepresenting material facts under the loan, such as the level of income, then anti-deficiency legislation does not apply. § 726(g) provides the exception to the fraud exception is that, if the Borrower’s home is a single family home, owned AND occupied by the Borrower, that is less than $150K in value, then the Lender may not seek a deficiency even if there is fraud.

Lastly, if the Trustor/Borrower has private mortgage insurance (PMI), then the Lender may not obtain deficiency from the Borrower. Any deficiency must be exhausted through the insurance carrier.

Should you have any questions or concerns, please contact our experienced real estate attorneys at Smith & Garg, LLC. The experienced real estate transaction and litigation attorneys at Smith & Garg, LLC can help.

Call Smith & Garg, LLC today at 1-877-517-4275 or complete our Contact Form and let us assist you.