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Anti-deficiency. That hyphenated word strikes fear into the minds of many note investors. And, for good reason, it should be respected.
With that said, for the most part, it need not be feared. The following discussion will go over some of the basics of anti-deficiency laws, specifically, when and where they apply, and how to navigate the landscape.
First thing is first: what is a “deficiency”?
A deficiency is essentially a shortfall in the proceeds received by a lender (i.e., the current balance of the loan, less the revenue received when that calculation nets a negative). This revenue can be the result of a foreclosure, a short sale, a deed in lieu, or any other number of workouts. However, a deficiency can also occur when a junior lien receives nothing by way of a foreclosure of a lien senior to it.
The many states that have anti-deficiency statutes therefore, attempt to limit the lender’s ability to collect against the debtor’s personal assets under certain circumstances. Instead, these states essentially require that the lender look to the property, and only the property, when seeking recourse on the loan. Of course, as with nearly any legal questions, there are nuances, exceptions, and instances where the appropriate answer is “it depends”, but we will try to give a broad overview of some of the major anti-deficiency themes below.
Several states, such as Alabama, have no or extraordinarily limited anti-deficiency statutes at all. That means that if you are the foreclosing lender and there is a shortfall you still have the option to file suit against the debtor for the deficiency as long as you fit within the statute of limitations. Other states, like Vermont, have anti-deficiency statutes insofar as the available recovery is limited to the difference between the fair market value of the property and the amount received at the foreclosure sale. On the other end of the spectrum some states, like California and Washington, have outright prohibitions on any deficiency when pursuing non-judicial foreclosure.
Even in states with anti-deficiency legislation, there are many circumstances when the statutes are inapplicable. Such is the case when a junior lender has been “sold-out” and is left completely unsecured. Though exceptions, of course, apply, generally speaking, if a senior lienholder forecloses and the junior lienholder is left with nothing, the junior lienholder does still have the ability to sue on the note and seek a personal judgment.
In the end, the anti-deficiency statutes are one more aspect of the note business that must be understood. Surrounding yourself with knowledgeable servicers, vendors, attorneys and trustees can help you navigate the landscape and effectively protect your interests.
(Vt. R. Civ. Proc. 80.1)
(Cal. Code Civ. Proc. § 580d)
(Wash. Rev. Code § 61.24.100)
(See, e.g., Cal. Code Civ. Proc. § 580b & Or. Rev. Stat. § 86.770 where a unity of lenders or purchase money status may limit availability of deficiencies even for sold-out junior liens.