Legal Question in Real Estate Law in California
Foreclosure Laws and Refinanced Loans
We currently have a property where the original loan was 165K. We recently refinanced, pulled cash out, and got a new loan with a balance of 251K. Because the property has significant negative cash flow, b/w 380-500K/mthly, our accountant has advised that we let the property go into foreclosure and get rid of the property. On the legal side, we want to be sure we understand the rules before proceeding. We heard that banks are more strict on pursuing homeowners with homes that have been refinanced. From a legal aspect, what can the lender do if we let these homes go into foreclosure? Are they limited to just the property as collateral or can they seize other assets? Can they issue a deficiency judgment? Will they issue a 1099?
1 Answer from Attorneys
Re: Foreclosure Laws and Refinanced Loans
To answer point by point:
(1) Refinancing loans are subject to deficiency judgments, but must be foreclosed judicially, i.e., in court rather than by trustee sale.
(2) Banks look at cash-out re-fis that promptly go into foreclosure as likely ripoffs, especially if it is non-owner-occupied property, and are more likely to go after the borrower for a deficiency judgment.
(3) Whether the bank goes after you for a deficiency judgment or not may depend upon what its research discloses about your other assets. If you have deep pockets, you're a target.
(4) I understand the recent law offering relief from 1099 reports applies to foreclosures of owner-occupied homes only.
(5) Probably the lender either must, or will elect, to go after the collateral first, but if they are eligible (see above) for a deficiency judgment in other respects, then they'll ask for one in any judicial foreclosure proceeding.
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