One of the major concerns facing the millions of homeowners who are currently delinquent on their mortgage and "upside down" in value is that they fear not only losing their homes but also being subsequently pursued for a deficiency judgment.

Different states have different laws regarding foreclosure and deficiencies. Anyone who has the kind of concern noted above should verify those laws in their own particular state.

In California, the threat of a deficiency judgment -- which, technically, may be real – is frequently, for practical purposes, not a serious one. In some situations there is no threat at all. The discussion that follows here pertains to California law.

In the context of this discussion, a deficiency judgment is a judgment that may be entered by a court. Generally, it is the difference between the foreclosure sale price (the successful bid amount) and the amount of debt owed. In order to obtain a deficiency judgment, a lender must apply to the court for the judgment within three months of a judicial foreclosure sale.

In California, a major exception to the deficiency judgment rules is that no deficiency judgment is allowed when the loan is a purchase money loan for owner-occupied residential property from one to four units. Simply put, if the loan was made for the purchase of your home, no deficiency judgment is allowed.

Another major exception to the deficiency judgment rules is that no deficiency judgment can be obtained if the foreclosure is non-judicial. To understand this, we must note that there are two kinds of foreclosure available in California. One – the overwhelmingly most common – is a non-judicial foreclosure, also known as a trustee sale. A non-judicial foreclosure occurs when, pursuant to a deed of trust, the lender notifies the trustee that the borrower is delinquent. The trustee files a public notice of default. Then, in approximately three months, if the delinquency has not been cured, the trustee publishes a notice of sale. Approximately three weeks after that, if there is still no cure of the default, a trustee sale occurs. (At the discretion of the lender, this sale can be postponed.) This foreclosure sale is the "auction at the courthouse steps." There is no court action.

In a non-judicial foreclosure, when a trustee sale occurs, there is no deficiency judgment available. If the property sold for less than the loan amount, that is the lender’s loss. There is no further recovery. (Two minor exceptions to this are: 1. if the loan had been obtained by fraud or 2. if the property had been intentionally damaged by the borrower.)

The other kind of foreclosure in California is a judicial foreclosure. This involves filing a lawsuit, to which the borrower may respond. Rather than taking the typical four to five months that a non-judicial foreclosure requires, this may take a year or more. Moreover, being a lawsuit, it can be costly. For reasons of time and money, then, lenders hardly ever file judicial foreclosures. It might make sense to do so in the context of a large commercial loan where a borrower might have significant assets worth pursuing. But it is hard to imagine many circumstances where it would be worthwhile to pursue a judicial foreclosure against a homeowner.

If a homeowner’s loan is not a "purchase money" loan – perhaps it is a subsequent "cash-out" refinance loan – then the borrower does have personal liability for the loan. It would be possible for the lender to seek a deficiency judgment. But to do so, the lender would first have to conduct a judicial foreclosure and, as noted, that is very unlikely.

Finally, we note a slightly different but increasingly common situation where a lender may pursue a borrower personally for liability on a loan secured by real estate. This is the case of a "wiped out" junior lien. Many homeowners have second mortgage loans, some even thirds. If these were loans incurred in order to purchase owner-occupied property, then they are subject to the same rules discussed above. No deficiency judgment is available. But if the junior lien is not purchase money, and if foreclosure by the senior lien (the first mortgage) leaves the junior unpaid, then they may pursue the borrower directly just like any other debt.

Deficiency judgments are certainly something for financially distressed homeowners to be concerned about. But they are not as widely available as is sometimes thought.

Published: June 15, 2010

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .