Your lender will place a lien on your property when you obtain a home loan. It secures your debt for the lender until the mortgage is paid in full. Junior mortgage liens are subordinate to senior liens -- usually first mortgages -- and they generally come in the form of a second mortgage, home equity loan or line of credit. In California, law related to junior mortgage liens in foreclosure proceedings, dictates loan payment priority from the sale of your property.
California Foreclosure Law
If you default on your mortgage payments in California, the lender will typically initiate a non-judicial foreclosure once you are 60 to 90 days delinquent on your mortgage. In contrast to judicial foreclosures, also allowed in California, which must proceed through the courts, a lender can seek non-judicial foreclosure without court intervention by way of the power of sale clause found in most mortgage contracts. The lender on your original mortgage loan is the first or senior lien holder of your property. Junior mortgage liens are any liens placed against your property subsequent to the original mortgage.
When a foreclosure sale, or auction, of your property takes place, the proceeds of the sale are distributed to the lien holders to pay off your loans. The first mortgage holder is usually the most likely to initiate foreclosure proceedings, and it receives the lion’s share of the proceeds from the foreclosure auction. California law related to junior mortgage liens in foreclosure requires that senior lien holders have payment priority, and junior lien holders are paid out of any remaining funds. If there is more than one junior lien on the property, they are paid in order of priority, based on the recorded time of each loan. Often, once the senior lien holder receives payment, unpaid property taxes, condo or homeowner association fees trump junior lien holders in priority. So, it is not uncommon for junior lien holders to go unpaid.
A deficiency judgment is when a lender comes after you for the balance on your mortgage loan if the proceeds of a foreclosure auction are insufficient to pay the entire amount you owe. Generally, deficiency judgments are not allowed in California, as most foreclosures are non-judicial. California has a “one-action rule” that prevents lenders from completing a non-judicial foreclosure and then pursuing a deficiency judgment, which constitutes a second action. Furthermore, lenders cannot obtain a deficiency judgment if the mortgage was for the purchase of your property. However, a junior mortgage lien holder can try to sue you for a deficiency judgment when auction proceeds are insufficient, or a first lien holder who utilizes a judicial foreclosure can pursue a deficiency judgment.
For California homeowners who are underwater on their mortgages -- owe more than their homes are worth -- and decide to file bankruptcy, it may be possible to “strip down” junior liens. Bankruptcy laws under Chapter 13, reorganization or wage earners bankruptcy, allow a homeowner to essentially eliminate a junior lien if the senior lien is equal to or exceeds the present value of the property. Bankruptcy and stripping off junior liens is really only helpful to you if it will make your first mortgage payments more manageable.