Lenders Who Hold Both 1st & 2nd Trust Deeds May Not Sue For Deficiency If They Foreclose Non-Judicially on First

In the days of easy money, many people purchased homes with little or nothing down. During the golden years of appreciation, many banks were offering “piggy back” loans, which included an 80% Loan to Value Loan representing the First Deed of Trust, and a 20% Loan, secured by a Home Equity Line of Credit (HELOC), or Second Trust Deed. Many of these properties are under water now and have no equity.
If the Bank who holds the first trust deed and the bank who holds the second trust deed are the same, if the lender decides to foreclose on California property, non-judicially, the foreclosure on the First Deed of Trust, would normally wipe out the second deed of trust, making the second deed of trust a “sold out junior lienholder”. Under California Law, a sold out junior lienholder is normally able to to sue the borrower directly on the note, because the security has become worthless. (Unless the loan was a purchase money loan). However, in 1992, the Appellate Court in California, in Simon vs. Superior Court 4 Cal.App.4th 63, held that where the lender is the same, who holds the first and second deeds of trust, by foreclosing the first deed of trust non-judicially, this precludes the lender from then seeking a deficiency judgment against the borrower on the second deed of trust. The rational is that under the one-action rule, once the bank makes an election to take the property to satisfy the debt, it is precluded from suing the borrower for a deficiency. If the lender wants to recover a deficiency, it must bring a judicial foreclosure

action. This case can be successfuly used negotiating short sales by short sale negotiators to get the bank to release the second deed of trust for a nominal payment.