Legal Question in Real Estate Law in California

Re: house

Wow, you were able to refi in 2008?

As your previous answer indicates, there are six or eight variables that bear upon what might happen. Starting with the assumptions that this is an owner-occupied house, that there is insufficient equity under current market conditions to pay off the $252,000 plus expenses, and that you have but a single loan, the possibilities are (1) a foreclosure by trustee sale - you lose the house but nothing else happens - and (2) a judicial foreclosure where you are taken to court both to foreclose and to get a judgment for the unrecovered balance on your loan, plus costs.

Which will the lender choose? Very likely, #1, because it is quicker and cheaper for them. However, if the lender thinks you are a rich guy, and the deficiency is large, they might be tempted to haul you into court and go after a deficiency judgment.

Now, the other scenario, where you have both a 1st and a 2nd. Whether the 1st forecloses by trustee sale or in court, the holder of the 2nd loses its collateral, and can sue you as an unsecured creditor--and probably will, if the amount makes it worth while.

Other lurking dangers are that a lender that's lost money can also sue without regard to the antideficiency laws if you have committed loan fraud or waste. Loan fraud would be like hyping your income or net worth on the application. Waste is things like cutting down the trees on the property the week before the foreclosure and selling the logs to the sawmill (and pocketing the cash).

Re: house

Unfortunately, the answer to your question is not one that is very easily accomplished in this forum. To answer your question, I am going to assume that the house is your primary residence. If the house is not your primary residence, then the following may not be correct.

From a legal perspective, you have two potential problems - one is the prospect of a bank coming after you post-foreclosure for a "deficiency". A deficiency is the difference between what the bank was owed, and what it actually recovered selling the home at auction. In California, there are two types of foreclosure - Judicial and Non-Judicial. A vast majority of foreclosures are non-judicial because they are quicker, cheaper (relatively) and do not require the involvement of the Courts. If the bank pursues non-judicial foreclosure, then the it generally cannot come after you for a deficiency.

You may have a potential problem if the $252,000 you owe is in two mortgages. If the 1st mortgage forecloses, and the 2nd mortgage holder is "sold-out" (the 1st mortgage holder takes the house, and the 2nd mortgage gets nothing) then you may face collections from the 2nd mortgage for the amount of that mortgage even though you lost the house, & irregardless of the deficiency protection. Again, there are a lot of variables to review here, so you'll want to review your specifics with an attorney. I've not yet heard of many lenders pursuing any collection efforts beyond non-judicial foreclosure as yet, but we are just at the very beginning of this mortgage crisis, and lenders will not simply walk away from money owed to them.

The 2nd problem is a personal income tax implication of foreclosure. As with the question of deficiency, there are a ton of variables, and I am not a tax attorney, so you need to consult with your CPA or Tax Attorney to answer this question.

I hope that this general information has helped. You should, however, consult with someone over the specifics of your situation to get solid answers based upon your specific situation. Unfortunately, this will cost you some money, but can probably help you decide what to do. One last suggestion is that there are some attorneys who are doing some pretty amazing things in Bankruptcy. We are not yet to a point where we can assist you with this, but I would refer you to James Doan - you can find them at doanlaw.com.

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