What happens if, when a property is foreclosed upon, it sells for less than the debt against it? Is the property owner/borrower liable for the difference between the total debt and the amount for which the house sold, which is called a “deficiency”?

Whether the property owner is liable for a deficiency is governed by the Anti-Deficiency Laws, which are discussed in another section. Assuming that a deficiency is available, how is the amount of the deficiency set? When the Anti-Deficiency Laws were passed, the California Legislature was fearful that lenders would manipulate the amount of the deficiency. Specifically, they were afraid that, at foreclosure sales, outsider bidders would not attend the sale, the lender would submit an artificially low credit-bid, and the borrower would then, in addition to losing his or her property, have to pay an unfairly high deficiency judgment.

To guard against this possible abuse, the amount of the deficiency is set, not by the amount which the property sold for in foreclosure, but by the “fair value” of the property. “Fair value” means fair market value, upon the date of the foreclosure sale. Fair value ordinarily is set by appraisal.

To set fair value, the creditor must file a motion for valuation of the property within three months of the foreclosure sale. Code of Civil Procedure 726(b). If such a motion is not filed within three months of the sale, then the lender can not recover a deficiency. At least fifteen days notice of the hearing must be given to all parties against whom a deficiency judgment is sought. Any party in interest may present evidence at the hearing of the fair market value of the property, on the date of the sale. Alternatively, a probate referee may be appointed to determine the fair value of the property, if requested by any party or on the court’s own initiative.