Legal Question in Real Estate Law in California

Re: short sale of home

I'm assuming, but can't be 100% sure from your description, that both loans were made by the same original lender and were purchase money. If so:

Your Realtor friend is correct in the case of an ordinary foreclosure, if two additional things are true: (1) the property is a one-to-four unit residential property, and (2) you occupied at least one of the units yourself as your bona fide personal residence. In this respect, I'm going along with Mr. Muntean.

However, a short sale with the lender holding BOTH notes (as seems to be the case here) is NOT a garden-variety foreclosure. It is a new agreement with the lender, probably superseding the agreements underlying both original notes. You might, therefore, no longer be in a purchase-money context. The short-sale contract could be considered a re-fi or a new extension of credit, and a default. There is also an argument that the lender is a "sold out junior," but this may not hold water because loss of its collateral was due to its own acts. In this case, my view is probably closer to Mr. Gibbs'.

Re: short sale of home

The real estate agent may have given you the correct advice. If either loan was not a purchase money loan there is a chance it is recourse beyond the property itself. however, without looking at the loan documents, no one can really tell. You need to get an attorney to look at the loan agreement to see what it really says. Otherwise this is all speculation.

Re: short sale of home

Your Realtor friend needs to stop trying to practice law, because he or she is not very good at it. In a short sale, the lender can do as they wish - they may (only if they deem it to be in their best interests) approve the sale of the home with your escrow proceeds not paying in full the loan amount. Almost 100% of the time, regardless of the nature of the loan (HELOC, Purchase Money, etc...) the bank with retain the right to collect the shorted amount from you after the property is sold. Remember, even though the bank agreed to accept less to let the collateral for the loan (the house) be sold, they still hold a signed promissory note from you, agreeing to repay whatever the total amount of the loan balance is, less whatever they did actually receive from the property sale. What your Realtor has confused this with are the laws regarding anti-deficiency after a foreclosure.

In answer to the last question in your post, the lender absolutely can and certainly will pursue you for the balance plus fees, costs and accrued interest unless in their short sale approval they specifically waive any right to pursue the balance they are owed, and accept the short sale proceeds as satisfaction in full of their two loans (again, this is rare). Also be aware that in some cases, the promissory note contains a provision which increases the interest rate in the event the collateral for the loan is sold, demolished, destroyed or otherwise lost. Tell your Realtor friend to go to law school before they attempt to give people legal advice.

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