Legal Question in Real Estate Law in California

Re: foreclosure rules

It depends, because foreclosure rules are complex. The vast majority of foreclosures are done by way of a "trustee's sale" which, on a first mortgage, does not allow for a deficiency judgment. If that was the case, your sister's debt would be wiped out. However, the foreclosure would not wipe of the debt of a second mortgage; a second mortgage lender could still sue your sister for the debt.

If a lender were to institute a lawsuit against your sister (either to collect on a second or via a judicial foreclosure) then there is a possiblity they could attach the life insurance proceeds. Usually this process doesn't happen automatically and takes some time.

These are the general rules. Your sister should give the documents to an attorney familiar with foreclosures to give her further advice on the matter.

Re: foreclosure rules

There cannot be a so-called "deficiency judgment" after a trustee's sale. The lender has recourse only to the primary collateral, and if the sale does not extinguish the debt, the lender eats the difference and cannot pursue the borrower's other assets.

However, in addition to a trustee's sale, a lender also has the option of judicial foreclosure, i.e., filing a lawsuit to require a court-conducted sale of the property. This is more expensive and time-consuming for the lender and is thus much less frequently pursued. If the foreclosure route elected is a judicial foreclosure rather than a trsutee's sale, there CAN be a deficiency judgment IF the loan was NOT a purchase-money loan. Most common examples of non-purchase-money loans are refinancing loans and home equity lines of credit.

There is one other unusual situation in which a lender can occasionally squeeze additional money out of a defaulting borrower, and that is where the borrower is guilty of what is termed "bad-faith waste." For example, if a water pipe starts to leak and the defaulting homeowner says "What the heck, I won't get it fixed, the darn place is going to be sold at foreclosure next month anyway" (for example), he might be sued successfully for the loss in value when all the plaster crumbles off the walls and the hardwood flooring warps.

So, in short, I think your sister's main exposure is if the loan to be foreclosed was a refi or a line of credit, and the deficiency is likely to be very large -- in such a case, the lender would likely opt for the judicial foreclosure route, and this would be especially likely if the lender were aware that substantial other assets might be available to satisfy the deficiency judgment.

In the circumstances you might want to have a local real-estate attorney assess the situation, especially after any action or notice is filed or served on your sister.

Re: foreclosure rules

It is not question of allowing a foreclosure because there's no equity in the property. Such a situation could affect your credit ability for many years to come. Moreover, that property still may increase in value by inflation alone. I would get to real estate attorney immediately the trial work out a forbearance agreement with the lender so that when she does get the insurance she can bring the payments current and avoid a great deal of problems. I am not even address the tax problems that you can not imagine will haunt her for years to come.i have been practicing law in this speciality for over 30 years in the san francisco bay area and if you wish to consult with me you can contact me at 925-945-6000.