Legal Question in Real Estate Law in California

A reduction in value from $377K to $90K seems really extreme! Were there any unusual factors? Bad luck? The possibility of fraud by the sellers? Lender agreement to a short sale is purely voluntary and based on the lender's assessment of the situation - the lender is probably financially sophisticated, knowledgable about the market today and informed about its chances for recovery, and more often than not is motivated by self-interest rather than any motivation to be charitable to the borrower. The lender will also be assessing whether you are vulnerable to a deficiency judgment if it forecloses rather than doing a short sale.

If you do a short sale, the agreement you negotiate will probably control whether you'll owe any of the difference. The short sale is a new agreement and the terms vary all over the map. Some leave the former owner/borrower clean and free; others impose liabilities that would not have existed in a foreclosure.

You will be able to apply for another mortgage, but even though the defaulted loan was only in your wife's name, the credit-rating agencies lilkely will figure out the marital relationship if your names were both on title, with a possible overall negative aspect. Further, any loan application you make in the future may contain questions requiring you to detail the previous loan situation. One thing potentially in your favor is that a lot of honest and otherwise trustworthy folks have been caught in the same grinder.