One-action rule

Q: What is One-action rule?

One-action rule is a legal requirement primarily found in California that stipulates a lender is permitted to file and pursue only one legal action in the event of a loan default. This means that if a borrower defaults on a loan, the lender must choose between either pursuing a foreclosure of the property or filing a lawsuit to collect on the note, but not both. This legal framework is designed to prevent lenders from pursuing deficiency actions on the note simultaneously with the foreclosure process. In situations where foreclosure is the chosen legal recourse and the property is sold for less than the outstanding loan amount, the lender is prohibited from seeking a deficiency judgment against the borrower for the remaining balance.

What is One-action rule?

One-action rule is a legal requirement primarily found in California that stipulates a lender is permitted to file and pursue only one legal action in the event of a loan default. This means that if a borrower defaults on a loan, the lender must choose between either pursuing a foreclosure of the property or filing a lawsuit to collect on the note, but not both. This legal framework is designed to prevent lenders from pursuing deficiency actions on the note simultaneously with the foreclosure process. In situations where foreclosure is the chosen legal recourse and the property is sold for less than the outstanding loan amount, the lender is prohibited from seeking a deficiency judgment against the borrower for the remaining balance.

Key Features of the One-action Rule:

Single Legal Action: Lenders must decide whether to foreclose on the property or to pursue the borrower for the amount owed, ensuring that they cannot do both.
Protection for Borrowers: The rule protects borrowers from being pursued for a deficiency in addition to losing their property through foreclosure, providing a measure of financial relief.
Foreclosure Process: If foreclosure occurs, the lender cannot seek additional compensation for the unpaid loan balance, which can alleviate the burden on borrowers during financial distress.
Deficiency Judgment Restrictions: This rule effectively eliminates the potential for lenders to pursue deficiency judgments, meaning borrowers are safeguarded from having to repay the difference if their property sells for less than the owed amount.

Real Estate Relevance:

The one-action rule has significant implications for both borrowers and lenders in the real estate market, particularly in California. Understanding how this rule operates can have a profound impact on real estate transactions, particularly during times of financial hardship:

Impact on Borrower Decisions: Knowing that they cannot be pursued for a deficiency judgment may encourage borrowers to consider strategic defaults if they are unable to maintain their mortgage payments. This could lead to an increase in foreclosures in a declining market.
Risk Assessment for Lenders: Lenders must carefully assess the risks associated with lending, as the one-action rule limits their recovery options. This can affect lending practices, interest rates, and loan availability.
Market Dynamics: The one-action rule can influence real estate market dynamics, as properties that may otherwise remain in the hands of the original owners are instead foreclosed upon, potentially flooding the market with distressed properties.
Importance for Investors: Real estate investors need to understand the implications of the one-action rule when purchasing foreclosed properties, as they may encounter significant discounts but also increased risk associated with the underlying loans.

Real Estate Example:

Consider a homeowner in California who has fallen behind on their mortgage payments due to unforeseen circumstances, such as job loss or medical expenses. Under the one-action rule, the lender must choose whether to initiate foreclosure proceedings on the property or to file a lawsuit to recover the outstanding loan amount. If the lender opts for foreclosure and the home sells at auction for significantly less than the mortgage balance, the homeowner is relieved of the obligation to pay the remaining debt. This can provide a fresh start for the borrower, who can then focus on rebuilding their financial life without the burden of additional debt.

In another scenario, a real estate investor is examining a distressed property that has been foreclosed upon. Understanding the one-action rule informs their decision-making process, as the investor knows that the previous homeowner cannot be pursued for any deficiency. This knowledge can affect the investor's strategy, as they may feel more confident in negotiating a price based on the understanding that the property is free of additional liabilities.

Important Notes:

The one-action rule applies specifically in California and may not be relevant in other states, where lenders may have different rights regarding foreclosure and deficiency judgments.
Borrowers should be aware that while the one-action rule offers protection, it may also lead to a negative impact on their credit score and long-term financial health.
Real estate professionals, including agents and investors, should stay informed about legal changes affecting the one-action rule to provide accurate advice and guidance to clients.

In conclusion, the one-action rule is a critical aspect of California real estate law that shapes the landscape of mortgage lending and foreclosure. By understanding this rule, both borrowers and lenders can make informed decisions that align with their financial goals, ultimately influencing the overall health of the real estate market in the state.