Legal Question in Real Estate Law in California

Re: Stop paying on rental property?

There are two possible problems for you. The first is whether defaulting on one loan is an automatic default on the other. The second is whether you would be personally liable for any deficiency after the income property is foreclosed and fetches less than the amount due the lender.

I would say read both loans carefully, especially the more recent one, to see whether there are any linking provisions such as an attempt to cross-collateralize the obligations or to "cross-default" them, i.e., make a default on one also a default on the other. Some loans have rather innocent-sounding things in their list of what constitutes a default.

As to issue #2, ordinarily, the anti-deficiency laws greatly limit the circumstances in which a purchase-money lender can go after a borrower for a deficiency. Even if the loan in question is a refinancing loan, and not a purchase-money loan, there is some recent case law that suggests the anti-deficiency laws may still protect you, except perhaps to the extent you took cash out when you refinanced. I can't promise that this new extension of the anti-deficiency law is going to stand up if further tested, e.g. in the Calif. Supreme Court, or even that all district courts will follow it.

Also remember that some of your home equity may be protected by homestead rights.

Re: Stop paying on rental property?

You have no anti-deficiency protection on a home that is not your dwelling. Thus, the lender may foreclose on that home, and then sue for a deficeincy owed. Once the lender gets a judgment it may go after your residence, but you have an exemption claim (anywhere between 50,000 and 150,000).