Legal Question in Real Estate Law in California

Re: Mortgage Fraud?

In addition to Mr. Whipple's fine answer, spouses must disclose all assets if there is a divorce. Failure to disclose an asset is fraud. The statute of limitations on fraud is 3 years from the date of discovery of the fialure to disclose. The court can award the entire asset to the defrauded spouse.

Re: Mortgage Fraud?

I think that the first thing that needs to be said is that folks who are married to each other have a legal (statutory) duty to be honest, candid, frank and forthcoming with each other as to financial, business, legal, etc. matters. See Family Code, section 721(b).

Any sneaking around of the type suggested by your question would probably violate this Code provision, rendering the various acts of subterfuge fraudulent and subject to voiding by a court and/or monetary damages.

Now, as to the more general proposition. As you know, there are three parties to the typical deed of trust: (1) the owner, borrower and trustor (all the same person or group of persons such as a husband and wife; (2) the lender or beneficiary; and (3) the trustee. Your question seems to ask whether #1 and #2, i.e., borrower and lender, can be the same. The answer here is probably not. You can't lend money to yourself. A court will not recognize too close a connection between trustor and beneficiary; the court would conclude that there was no real obligation. See, e.g. In re Universal Farming Industries (9th Circuit, 1989) 873 F.2d 1334; Wilson v. McLaughlin (1937) 20 Cal.App.2d 608.

My overall impression is that the arrangement you allude to is a sham and a fraud; that it will be torn apart by a judge; and that the spouse who designed it will be raked over hot coals.