California foreclosure & the 2nd deed of trust

by Cathy Moran, Esq.

August 14, 2007

When the lender secured by a first deed of trust forecloses in California, any liens on the property junior (newer) to the foreclosing lien are “cut off”, that is , those junior liens are no longer liens on the property in the hands of the buyer at the foreclosure sale.  The cut off junior liens have the right to sue the borrower for their money.

Why, you ask, doesn’t the junior lien foreclose and protect its lien on the property?  It’s a matter of economics:  a successful bidder at a foreclosure sale takes the property with the liens senior to the foreclosing creditor in place. So, the holder of the second deed of trust who forecloses and takes title to the property at the foreclosure sale must then cure any arrears to the first deed of trust and pay  any delinquent property taxes or be dispossessed by a foreclosure sale by the holder of the first.  Usually, the second lender doesn’t want to put more cash into a deal that’s already gone bad in order to preserve its lien.

Thus, in situations where the homeowner has already lost the property to a foreclosure by the senior lender, any cut off junior lien holders may pursue the borrower on the debt.  In contrast, any secured lender who uses the “power of sale” contained in the deed of trust to foreclose gives up the right to sue the borrower for any deficiency  or shortfall in the value of the property compared to the debt.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

Last modified: June 15, 2012