The first of the Anti-Deficiency Laws is Code of Civil Procedure Section 580b. It prohibits deficiency judgments after the foreclosure of a purchase money mortgage or deed of trust. It applies only to residential properties, of one to four units, occupied in whole on in part by the borrower. “Under 580b, a vendor taking back a purchase money trust deed may look only to the security for recovery of the debt; no deficiency judgment will lie following a sale under the trust deed. The vendor thus assumes the risk that the value of the security may become inadequate” Lawler v. Jacobs (2000) 83 Cal. App. 4th 723, 732.
Section 580b prohibits a lender from suing the borrower, after a foreclosure, for the deficiency. It does not prevent a lender from taking additional actions under the loan documents. If, in addition to the real property mortgage or deed of trust, the lender has a security interest against personal property, the lender may pursue the personal property collateral. Christopherson v. Allen (1961) 12 Cal. Rptr.
CCP 580b Protections Cannot Be Waived
When you sign loan documents, there are often pages of “fine print.” If you read the fine print, you will find that lenders often seek to have the borrower waive the protection of laws enacted to guard borrowers. If a lender tries this with CCP 580b, however, the waiver is not enforceable. The protections of CCP 580b cannot be waived, either at the time that the loan is made or later. DeBerard Properties, Ltd. v. Lim (1999) 20 Cal. 4th 659.
CCP 580b and Junior Liens
What happens if a purchase money mortgage or deed of trust is in junior position, and the senior mortgage forecloses first, and wipes out the junior? As long as the junior mortgage or deed of trust was a purchase money lien, at the time that the loan was made, Section 580b prevents the lender from suing on the note, even though the security is now worthless. Brown v. Jensen (1953) 41 Cal. 2d 193, 197; Raub v. Lee (1960) 181 Cal.App.2d 529.
What is a purchase money loan for CCP 580b purposes?
Under Section 580b, the critical question is whether a given loan is or is not a purchase money loan. This is determined at the time that the loan is created. If a loan is purchase money, it does not cease to be so because new notes are exchanged on substantially similar terms, DMC, Inc. v. Downey Savings & Loan Association (2002) 99 Cal. App. 4th 190, or because the property is transferred to a new owner, who either formally assumes the loan or simply takes the property subject to the loan. Frangipani v. Boecker (1998) 64 Cal. App. 4th 860.
To qualify as a purchase money loan, it is not necessary that every dime of the loan go to the purchase price. A loan is still a purchase money loan, under CCP 580b, even if some of the loan money goes to termite work, roof repairs and closing costs, as long as all of the expenses were necessary to complete the closing. Shephard v. Robinson (1981) 128 Cal. App. 3fd 615. Separate loans, however, made for improvements to the property, not necessary to complete the purchase, do not get purchase money protection. Allstate Savings & Loan Association v Murphy (1979) 98 Cal. App. 3rd 761 (Loan made to build swimming pool not a purchase money loan under 580b.)