After “While it was a purchase money loan, Lender B didn’t get their one action, so they can go after a deficiency.” should have been the following:

“This seems like a contradiction because Sec 580 says it applies to a sold out junior that was a purchase money loan, some lenders are claiming that because the 20% 2nd in the 80/20 is actually a HELOC, it isn’t afforded the protection under 580.”

Sorry for any confusion that may have created.

For those that have done FHA improvement 2nds that funded at close of escrow, HUD was able to seek a deficiency against a CA borrower where the 1st foreclosed and HUD’s improvement loan was the cut off junior. The court ruled that it wasn’t purchase money and allowed HUD to attached wages.

Moral of the story is that consulting an attorney before walking is imperative.

Many mistakenly believe that the non-recourse protection afforded purchase money loans means they can walk from both a 1st and 2nd without consequence. If the 1st forecloses via a trustee sale, Lender A got their one action, but what about the 2nd and Lender B? While it was a purchase money loan, Lender B didn’t get their one action, so they can go after a deficiency.

FWIW, I am seeing lenders pursue deficiencies on cut off juniors and some bank insiders have told me that when the dust clears in few years, they will go after the deficiencies in some instances, particularly the ruthless defaults where ability to pay was there, but the borrower made a “business decision” to walk.