The majority of the states limit the mortgagee’s right to a deficiency judgment. Some limitations are procedural. For example, many states impose strict notice requirements and the time limits on the mortgagee. Failure by the mortgagee to comply with these limitations can destroy the right to obtain a deficiency judgment.
Likewise, failure to comply with “one action” rules also can destroy the mortgagee’s right to the deficiency judgment. Under such rules, the mortgagee’s only remedy on default is foreclosure, and he must obtain any deficiency judgment incident to the foreclosure proceeding. Two justifications are often cited for this rule: One is to protect the mortgagor against the multiplicity of actions when the separate actions though theoretically distinct, are so closely connected that normally they can and should be decided in one suit.
The other is to compel a creditor who has taken a mortgage on the land to exhaust his security before attempting to reach any unmortgaged property to satisfy his claim.
Similar restrictions sometimes apply to the power of sale foreclosures. In such situations, the exercise of the power of sale is a condition precedent to a subsequent action at law for a deficiency. Some commentators refer to this restriction as the “security first” principle.
There are also important substantive limitations on deficiency judgments. As a result of the depression of the 1930’s many state enacted “fair value” legislation and most of this legislation is still in force. Fair value statutes usually define the deficiency as the difference between the mortgage debt and the fair value of the foreclosed land, rather than as the difference between the mortgage debt and the foreclosure sale price of the land. Depending on the statute, a court or a jury may determine the fair value. Most of these statutes were designed to deal with depression conditions when foreclosure sales typically yielded nominal amounts. This legislation, however, also assumes that even in a stable economic climate, a forced sale of real estate will yield a price significantly lower than otherwise would be obtained by private sales.
Closely related to the fair value approach are the appraisal statutes used in a few states. This legislation requires the court or the person conducting the foreclosure sale to appoint an appraiser, who determines the value of the property. For example, in south California, a statute reduces the deficiency by the difference between the foreclosure sale price and the appraisal amount.