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.
Under the traditional approach followed in many jurisdictions, once the mortgage goes into default and the obligation is accelerated, the mortgagee has two options. The mortgagee may either obtain a judgment on the personal obligation and the enforce it by levying upon any of the mortgagor’s property and, if a deficiency remains, foreclose on the mortgaged real estate for the balance or foreclosure on the real estate first and if the proceeds are insufficient to satisfy the mortgage obligation, obtain a deficiency judgment thereafter. Some jurisdictions following the above approach require the mortgagee to elect one of the two options. The Restatement agrees; see Restatement (Third) of Property (Mortgages 1997). Other states, however, reject this “election of remedies” requirement; the mortgagee is permitted to follow both options simultaneously with the only limitation being that the mortgage obligation may only be satisfied once.
Under the traditional approach, a deficiency judgment is calculated by subtracting the foreclosure sale price from the mortgage obligation. If the foreclosure is judicial, the deficiency judgment is obtained in the same proceeding after the foreclosure sale. Where the foreclosure is by a power of sale, the mortgagee obtains a deficiency judgment by filing a separate judicial action against the mortgagor.
Forced sale even under stable economic conditions, normally will not bring a price that will reflect the reasonable market value of the property if it were marketed outside the foreclosure context. Moreover, in times of several economic downturn, mortgaged property often sells for substantially depressed prices. To make matters worse, mortgagees occasionally purchase at the foreclosure sale for a deflated price, obtain a deficiency judgment and resell the real estate at a profit.
The great depression of the 1930’s, as might be expected, produced a substantial amount of varied state legislation to provide relief for mortgagors. Perhaps best-known were the various moratoria statutes. Such legislation different from state to state. Some statutes gave courts authority to grant foreclosure postponements on petition of mortgagors in the individual case. Other statutes extended the period of statutory redemption beyond the usual period or stretched out the periods of time in a foreclosure action. Most of this legislation was upheld against federal and state constitutional attack. Constitutional law students are a family with Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), which upheld the Minnesota legislation, finding it not to be an unconstitutional impairment of the obligation of contracts.