With the proliferation of first and second combination loans during the last real estate boon,  new legal questions developed.   Clients often ask “Am I subject to deficiency on my second if the junior lien was taken out simultaneously with the first for the purpose of purchasing the home?”  That’s a great questions!

Typically money lent to purchase a home is not subject to deficiency following a foreclosure or short sale.  But it was not typical to receive a junior lien at he time of purchase.  As a general rule, junior liens were taken after close and were subject to deficiency law.

This new lending practice left a gray area in the laws interpretation.  And ultimately, to get the best answer to this questions, the advice of a California real estate attorney should be consulted.

As of November 2010 the California Association of Realtors (CAR) have revised form SSIA (short sale information and advisory).  In it they clarify continued liability on debt.  Section 4E is quoted below:

E. Junior Liens: The anti-deficiency protections for Junior Liens are also somewhat unclear. Junior liens used to purchase the residence (such as 90/10 first and second) would have “purchase money” protection generally. However, junior liens that are refinanced or junior liens that are used to take out equity do not have “purchase money” protection. Such “non purchase money” junior lien holders may be able to pursue a deficiency judgment against the borrower directly after a Trustee sale by a senior lien holder or after a judicial foreclosure by the junior lien holder.

Although the law is not entirely clear, home equity loans (HELOCs) may fall into this category.

Once again, always check with your real estate attorney when seeking legal advice regarding your specific loan situation.  However, in general, it looks to me like CAR is standing behind the position that if you received a junior lien as part of a home purchase, aka “purchase money”, that deficiency judgments may be prohibited in California.

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