Legal Question in Real Estate Law in California

Re: Real Estate Short Sale

The two mortgages are separate. Short sales are always difficult to accomplish and often impossible. You may want to contact me for a referral to a company that can offer other solutionss if a short sale does not appear to be in the cards. But, they only get involved prior to foreclosure sale.

Re: Real Estate Short Sale

In Wall Street corporate lending and in the venture capital business, it's not uncommon for a borrower's loans to be "cross-collateralized and cross-defaulted" so that a default on one is a default on all, and collateral for one is collateral for all.

To know whether this would be the case with your loans, you'd have to read both of them, or have a lawyer do it, but in most cases cross-collateralization would not be legal due to the "collateral first" rule in Code of Civil Procedure sectio 726.

Cross-defaulting is maybe more likely but even so I don't think it's usual in the primary market; when loans are repackaged and sold it's more likely, but that wouldn't affect you.

OK, moving on, there is also the possibility of a so-called deficiency jusdgment, which is a judgment against the borrower for a shortfall when a property is foreclosed and sold for too little to cover the loan and costs of foreclosure. Again, due to provisions of the Code of Civil Procedure, a lender cannot get a deficiency judgment following a foreclosure by trustee's sale, nor (in most cases) on foreclosure of a purchase-money loan, whether it is a first or a second. Refinancing and cash-out loans done after the initial purchase can, however, be foreclosed in court proceedings and a deficiency judgment obtained (with a few exceptions). If the lender is eligible for, and obtains, a deficiency judgment, that judgment can be enforced against your other property, and your lender will certainly be considering whether it can pursue a judicial (court) foreclosure to its advantage.

Noting that one of your loans with this lender is a second, I'd guess that it is not a purchase-money loan, and this is a matter of concern, suggesting that you may be vulnerable to a judicial foreclosure, especially since the lender knows all about your other property.

There is one other area of possible threat. Even if the lender cannot get a deficiency judgment because your loan is purchase-money or because it elects the speedier and cheaper route of foreclosing by trustee sale, it may be able to sue you for something unconnected with the loan obligation per se, such as falsifying your income on a credit application or for trashing the property and thus unfairly reducing the collateral value.