While I’ve covered several different consumer law topics over the course of my blog, I have yet to touch on the issues and rules associated with mortgages. During the bubble burst of the late 2000’s, foreclosure was an unfortunate reality for many home owners. Since then, the rate of foreclosure has diminished and people are again becoming comfortable with the idea of purchasing a home and financing it through a mortgage. Unfortunately, one of the harshest truths of existence is the uncertainty of what the future brings. And for some home owners events will transpire which will cause them to fall behind on their mortgage payments. If you fall behind on your mortgage payments it’s important that you understand the rules governing a mortgagee attempting to collect money due to it.
One of the key differences between a mortgage lender and a regular creditor/debt collector is the fact that the mortgagee’s loan is secured by the home that is the subject matter of the mortgage agreement. Which means in the event of a home owner failing to make payments, the mortgagee can take steps to offset the home owners delinquency such as selling the home in foreclosure. In the alternative, a mortgagee may try and sue the home buyer in court for the remainder of the mortgage payments. More often than not a mortgagee will not sue on the underlying indebtedness of the debtor but will simply pursue a foreclosure and nothing more.
The reason a mortgage lender does not also file a lawsuit against the debtor for the underlying indebtedness is due to California’s “Security First” Rule. This rule is codified by California Code of Civil Procedure Section 726(a) and it (among other things) prevents a secured creditor from ignoring its security and suing on the underlying debt. What that means is that a creditor cannot sue a debtor for a mortgage without first foreclosing on the property. If a mortgage lender does file a lawsuit without having first foreclosed on the property then they are in violation of CCP 726(a) and their debt collection lawsuit will fail.
Once they have foreclosed on the property, they are still not able to file a lawsuit on the underlying debt. Another rule in California entitled the “One Action” rule holds that a creditor may only take one form of action in trying to collect on default mortgage. Which means that once a mortgage lender forecloses on a property, they are legally forbidden from pursing a lawsuit in addition to the proceeds of the foreclosure. This is true even if the amount the mortgage lender receives in foreclosure is less than the amount of mortgage. I will go into greater detail on the “One Action” rule in a future blog post.
It’s important to note that the “Security First” rule only applies to a creditor that is the first secured creditor of a home. Home owners might take out a mortgage and a Home Equity Line of Credit; and which ever credit extension is first in line on the registry of secured creditors will be subject to the “Security First” rule while the second secured creditor may be permitted to file a lawsuit against a former home owner after the property has been foreclosed on. Still California’s anti-deficiency laws may limit the second secured creditors rights and abilities to collect money from the home owner. Generally speaking, if you are being sued by a secured creditor and they have not first foreclosed upon your property then they may be in violation of the law.