Legal Question in Real Estate Law in California

As a general rule, a co-owner can collateralize his or her promissory note with, and only with, his or her interest in the co-owned property. If someone is a half owner, the extent of the collateral that can be given is a half interest. Most lenders recognize that there isn't much market for fractional interests in real property where the other owners are strangers, and therefore half interests aren't very good collateral and are seldom used to secure loans. However, it can and does happen, and when there is a default, the situation can be messy. Also, there are situations where a co-owner grants a lender a security interest and somehow conceals the fact that he/she isn't the full owner. Situations of this kind are fraudulent.

You are confusing the debt with the collateral. The promissory note has nothing much to do with who owns the property. The note evidences the debt, not the collateral. Whomever is going to be liable for the debt, regardless of collateral, needs to sign the promissory note. The collateral is a separate issue, and requires a separate document, generally a deed of trust if it is real property. As Mr. Whipple describes, if there are multiple owners, only the share(s) of the person/people who sign the deed of trust become collateral for the debt. As he also says, if less than all the owners sign, the collateral is not worth much, but it is still legally valid.

It takes all owners to sign the security instrument to fully pledge the collateral. The person who signs the promissory note is the only person who will be personally liable for the debt.