WHAT IS A DEFICIENCY?

A deficiency is “the difference between the amount of the indebtedness and the fair market value of the property…” Garretson v. Post (2007) 156 Cal. App. 4th 1508, 1516. Lets say the mortgage against a property was $500,000. Lets say the fair market value of the property was $300,000. The deficiency would then be $200,000.

California law has long been concerned about deficiencies. For over a century, California has had a dramatic boom-bust cycle, in which real estate prices first go way up and then crash dramatically downward. This cycle threatens property owners with ruin, if they buy property at the peak of the boom, lose the property in foreclosure during the bust and are slammed with personal liability for the deficiency.

To protect property owners, during the Great Depression of the 1930s, California enacted the Anti-Deficiency Laws. Collectively, these laws make it difficult for a lender to collect a deficiency judgment, for real property secured debts. The purpose of these laws is “(1) to prevent a multiplicity of actions, (2) to prevent an overvaluation of the security, (3) to prevent the aggravation of an economic recession which would result if creditors lost their property and were also burdened with personal liability, and (4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor.” Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308, 318 (internal citations omitted).

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