If a person is unable to keep up with mortgage payments, it may result in the property being foreclosed and subject to sale. What usually happens is that the proceeds of the foreclosure sale will be forwarded to the mortgage company, in order to make up for late or missing mortgage payments. 

If the profits from the foreclosure sale do not satisfy the mortgage debt, the lending company is sometimes allowed to file a lawsuit requiring the borrower to pay the difference between the debt and the foreclosure sale proceeds. This is known as a deficiency suit or deficiency judgment. For example, if the foreclosure sale yielded $9,000, but the mortgage company is owed $10,000, they can file for a deficiency judgment to compel the borrower to pay the remaining $1,000. 

What Are Anti-Deficiency Laws?

Anti-deficiency laws prohibit mortgage companies or other lending institutions from filing deficiency lawsuits. This effectively allows a borrower to walk away from a foreclosure sale without owing the lender any further amounts, even if the foreclosure sale did not fully satisfy outstanding debts.

If an anti-deficiency law is in effect, the lender can really only recover the property itself as well as the proceeds from subsequent sales. They may often end up with losses, because under such laws they cannot force the borrower to make up any differences. 

Even if a court permits a lender to pursue a deficiency judgment, anti-deficiency laws typically create a limit on how much lenders can collect from borrowers. The typical limit on deficiency collection is fair market value; the lender cannot collect more than the difference between amount of debt and the fair market value. However, many states will differ on what "fair market" means, given the state of the economy, housing market, and value of property in each state.

Which States Have Anti-Deficiency Laws?

The following states have anti-deficiency laws: Alaska, Arizona, California, Connecticut, Hawaii Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Washington, and Wisconsin.

In Hawaii, the foreclosure must be executed after July 1st, 1990 in order for anti-deficiency protection to apply.

In Nevada, anti-deficiency protection only applies if certain conditions apply. One of those conditions is that the loan must originate on or after October 1st, 2009.

In Iowa, anti-deficiency protection is limited to cases where the lender chooses foreclosure without right of redemption and the borrower does not demand that the foreclosure be delayed.

When Are Anti-Deficiency Laws Inapplicable?

Not all states have anti-deficiency laws in place. In such states, borrowers are not fully protected against deficiency suits, and may be compelled to pay mortgage deficiencies.

Even if a state has anti-deficiency laws in place, they may not always be applicable in every situation. For example, anti-deficiency laws generally do not apply if:

  • The agreement in question is for a second mortgage or for a home equity line
  • The property is not being used as the primary residence of the borrower
  • The loan was not for the purpose of purchasing the house or dwelling
  • The property was purchased through a short sale
  • The foreclosure sale was ordered by a court of law ("judicial sale")
  • The borrower obtained the property through fraud

Note that the laws of each state are. For example, California gives borrowers anti-deficiency protection even if the borrower is on their fourth mortgage. Other states will not be as forgiving.

There may be factors in each individual claim that may affect the applicability of anti-deficiency laws. You may wish to consult with a real estate attorney if you have any question about the rules in your area.

What Is the One-Action Rule?

Some states will not permit lenders to collect deficiency judgments unless the lender follows a certain legal process. For example, in California, lenders cannot pursue a deficiency judgment unless they use judicial foreclosure. California forces lenders to choose between a quick foreclosure in non-judicial foreclosure or the possibility of collecting a deficiency judgment through judicial foreclosure.

What If the Borrower Waived the Right to Anti-Deficiency Protection?

Borrowers generally cannot waive their right to use anti-deficiency laws if the borrower was the primary borrower of the loan. Anti-deficiency laws are a matter of public policy and thus private parties cannot waive anti-deficiency laws through contract or mutual agreement. If a state permits parties to waive anti-deficiency protection, there must be an explicit statute for doing so.

Some states permit borrowers to waive anti-deficiency protections if the borrower is a guarantor of the loan. A guarantor is someone who agrees to pay the debt if the primary borrower, or borrower who promised to pay the loan originally, defaults.

Do I Need a Lawyer for Issues Regarding Anti-Deficiency Laws?

Real estate matters involving foreclosure, mortgages, and deficiency judgments can often be confusing. If you have any questions or concerns regarding anti-deficiency laws, you should speak with a real estate lawyer immediately. Your lawyer can help determine whether you are protected under anti-deficiency laws, and can inform you of what your options are under law.