SOLD OUT JUNIOR LIENS

If a senior lien forecloses on a property, this wipes out the mortgage or deed of trust of all junior lien-holders. Can those sold-out junior lien-holders now sue the borrower under their note? The general answer is “yes”, a sold-out junior mortgage holder can sue under the note after its lien is wiped out by the foreclosure by the senior. National Enterprises, Inc. v. Woods (2001) 94 Cal. App. 4th 1217.

The primary exception to this rule relates to purchase-money loans. As discussed above, CCP Section 580b ordinarily bars deficiency judgments under purchase-money residential loans. The California Supreme Court has repeatedly held that, if CCP Section 580b otherwise applies to a loan, it bars a suit by a sold-out junior note holder. Brown v. Jensen (1953) 41 Cal. 2d 193; Spangler v. Memel (1972) 7 Cal. 3rd 603.

What this means, as a practical matter, is that Home Equity Loans or HELOCS are particularly dangerous in a foreclosure. If the homeowner took out two or more loans, as part of the purchase price of the home, he or she is protected from personal liability to those junior loans. If, on the other hand, he or she took out a home equity line of credit, secured by a junior lien, the homeowner probably has personal liability on the junior note, if the senior forecloses.

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