Robert B. Jacobs: 'Sold-out juniors can be a concern

DURING the past two weeks, this column addressed some important issues concerning foreclosure. But as noted, foreclosure law is extremely complex. Self-help is never a good idea in complex legal matters, and even though a foreclosure may seem like a straightforward matter, many laws affect foreclosures and foreclosure liability.

Property owners either facing foreclosure or considering it should seek competent legal counsel. Only a skilled professional properly trained or experienced in real property foreclosure matters is prepared to render adequate foreclosure advice. When people ask me whom they should consult with respect to foreclosure issues, I always recommend that they consult a properly trained or experienced attorney.

Last week's column addressed some issues concerning a nonjudicial foreclosure. Nonjudicial foreclosures are those where a trustee conducts a foreclosure proceeding pursuant to a deed of trust, and where no lawsuit, summons or complaint is involved with the foreclosure.

The column stated that there can be no deficiency judgment in a nonjudicial foreclosure proceeding. That is a true statement. Even though there can be no deficiency judgment following a nonjudicial foreclosure however, an "adverse judgment" is still possible. This is because an adverse judgment is not the same thing as a deficiency judgment.

The details are as follows. If an owner defaults on a loan secured by a deed of trust, then the property can be sold to satisfy the amount remaining due on the loan. If the property is sold without a lawsuit, then there can never be any deficiency judgment against the property owner.

Deeds of trust are generally given priority according to the date they are recorded.

Senior, junior deeds

When two deeds of trust are recorded against a property, the first deed of trust is commonly referred to as a "senior" deed of trust. The second deed of trust is referred to as a "junior" deed of trust.

If the holder of the senior deed of trust forecloses and the property is sold, then the holder of the junior deed of trust becomes a "sold-out junior." Complex rules govern the rights of such a sold-out junior.

In some circumstances, however, the sold-out junior will have the right to file a lawsuit against the property owner based solely on the promissory note. This is allowed because the security, or the deed of trust, that secured the junior loan was "wiped out" through the foreclosure.

What this means is that when property owners have two mortgages or deeds of trust on their property, a very careful evaluation must be made to determine whether the property owner might be liable to the holder of the second deed of trust if the holder of the first deed of trust forecloses. This is all part of the very careful analysis that must be performed in determining the best course of action for an owner either facing or considering foreclosure.

Damage control

Guessing on these matters is not a preferred course of action. Sometimes it's difficult for a homeowner even to think about paying attorneys fees for advice with respect to a foreclosure. A lot of money already has been lost on the property, and the homeowner probably doesn't feel like spending more. But such expenses are paid in the nature of damage control. read more