The One-Action Rule and Anti-Deficiency Rules

Security first

Section 726 is the starting point, and it is known as the one-action rule. There can be but one form of action to recover a debt secured by a mortgage or deed of trust on real property. In plain terms, the lender gets one route to collect, and it has to go against the property it holds as security first. Only once that security is exhausted can the lender look to the borrower personally.

The rule has teeth in both directions. The note is the borrower's written promise to repay. A lender who sues on the note without proceeding against the security first can lose the security altogether. That is a serious consequence, and one reason lenders are careful about sequence.

No deficiency after a trustee's sale

A deficiency judgment is a court order making the borrower pay the shortfall left when the property sells for less than the debt. Section 580d provides that no such judgment may be rendered once the property has been sold by the trustee under a power of sale. That covers a note secured by a deed of trust or mortgage on real property. A power of sale is the clause that lets the lender foreclose without going to court.

This is the practical protection for most California homeowners, because most foreclosures are nonjudicial, meaning they happen outside court. The lender chooses speed and gives up the deficiency. The trade is deliberate.

It does not extend to guarantors, pledgors or other sureties, who are people that backed the loan for someone else. They can remain liable. That distinction matters where a family member signed as guarantor on the loan, or where an entity borrowed and an individual signed as guarantor.

Purchase money protection

Section 580b bars a deficiency on a purchase money loan. That is a loan used to pay all or part of the purchase price of a home. The property has to be a dwelling for not more than four families, occupied in whole or in part by the purchaser.

The protection follows the purpose of the loan rather than the method of foreclosure. What matters is that the money bought the home and the borrower lives in it.

Refinancing is where this gets complicated, because a refinance may not be a purchase money loan. Whether protection survives depends on the facts of the refinance. It is worth establishing from the paperwork before assuming either way.

Why the sequence is worth understanding early

For a homeowner facing default, one question matters most. What is still owed once it is over. The answer depends on the type of loan, the type of property, whether it was occupied, and which route the lender takes.

Those facts can often be established from the loan documents in an afternoon, and knowing the answer changes what a sensible response looks like. Someone protected by section 580b is in a very different position to a guarantor on an investment property.

Which protection applies to you

Start with how the lender is proceeding. Nonjudicial means the foreclosure was carried out without going to court. If the property was sold at a nonjudicial trustee's sale under the power of sale, section 580d bars a deficiency judgment on that note. This covers most California foreclosures.

Then look at the loan itself. Was the money used to buy the property. Is the property a dwelling for not more than four families. Does the borrower occupy it in whole or in part. If all three hold, section 580b bars a deficiency regardless of how the foreclosure proceeded.

Then look at who else signed. Guarantors, pledgors and other sureties do not receive the section 580d protection. So a family member who signed as guarantor on the loan can remain exposed after the borrower is not. The same goes for an individual who backed an entity's borrowing.

Finally, section 726 sits behind all of it. One form of action, and the security comes first. A lender that ignores the sequence can lose the security altogether.

Refinancing, and how protection is lost

Section 580b follows the purpose of the loan. A loan used to buy the home is purchase money. A refinance may not be, because the new money was used to pay off the old loan rather than to buy the property.

This produces a common and unwelcome surprise. Take an owner who refinanced to pull cash out, or simply to get a lower rate. They may not hold the same protection they had on the original purchase loan.

Whether protection survives a particular refinance depends on the facts. That includes whether the new loan was with the same lender, and how much of it went to purchase money. It is worth establishing from the loan documents rather than assumed either way, because it changes what is at stake.

Second loans and HELOCs

The senior lender is the one holding the first loan. Where it forecloses nonjudicially, a junior lender's security is eliminated by the sale. That leaves the junior holding an unsecured debt, meaning a debt with no property behind it. The junior may be able to sue on the note, because it did not conduct the sale that triggers section 580d.

Whether it can depends significantly on what the junior loan was. A junior loan that was itself purchase money is protected by section 580b. A later home equity line frequently is not.

This is the most common route by which a homeowner who believed the foreclosure ended the matter hears from a second lender afterwards.

This article is general information about California law and is not legal advice for any specific situation. If you are dealing with this issue, the facts of your matter will change the analysis.