Legal Question in Real Estate Law in California

Re: Title of house

It does not matter whose name is on title, only whose name is on the loan on the house. In California, the holders of purchase money deeds of trust (an instrument which secures a loan and places a lien on real property) have one of two courses of action when a loan goes into default. The lender can either foreclose on the loan, in which case the lender gets title to the property, or they can sue the borrower to recover a money judgment; however, they must choose one or the other, they cannot have both remedies.

Unless the borrower (pesumably your brother-in-law) owes far more than the property is worth, if the house goes into foreclosure (and assuming there is only one loan on the house), the foreclosing lender will simply take the property back, and your husband will lose the property and nothing more.

If your husband's brother has more than one loan on the house, the second and all other subsequent lenders would be considered "sold out junior lien holders." In that event, those lenders could sue whomever is named on the loan(s).

Re: Title of house

I generally agree with the previous answer. The lender's two courses of action might better be described as out-of-court foreclosure through exercise of the power of sale granted by a deed of trust - this is a private process where a trustee sells the house and distributes the proceeds of sale in the manner prescribed by law; versus a so-called judicial foreclosure, in which the lender sues in court on the unpaid debt and the collateral (the house) is first sold to raise money to satisfy the debt.

If a loan is a purchase-money loan, or if the lender chooses foreclosure by trustee's sale, the lender cannot seek a deficiency judgment for additional money to cover a shortfall upon sale. A deficiency judgment is almost always limited to situations where the foreclosure is judicial (in court) AND the loan foreclosed is not a purchase-money loan.

As stated, holders of junior liens who lose their collateral due to foreclosure of the senior lien can sue if they aren't paid off from the proceeds of foreclosure.

There are three further concerns raised by the facts given, however. First, taking over someone's home, particularly if it is a gift or a transfer for less than fair market value, is subject to creditor challenge as a fraudulent transfer. One cannot give his house to his relative to protect the equity in the house from creditors. This concern doesn't apply to mortgage lenders (who are presumably already fully secured by the property), but it could be that doctors, hospitals, etc. could feel that scooting the house out of the patient's name and into the name of a relative was an attempt to shelter assets from existing and potential creditors, a practice made fraudulent by the Uniform Fraudulent Transfer Act and codified at Civil Code sections 3439.01 to 3439.12. The transfer can be un-done by a successful creditor lawsuit and both parties to the transaction might be liable for damages.

The second concern is that most residential loans have a "due on sale" clause. Such a clause usually says that if the borrower transfers an interest in the mortgaged property by sale or gift, the loan becomes (at the option of the lender, in most cases) fully due and payable. The lender would have the right to demand immediate payment in full, although often they will waive the clause and reinstate the loan for a fee.

Third, transfers of real property have gift, capital gains and property tax consequences, mostly unfavorable.

I recommend that your husband contact a lawyer who can give direct and personal advice after reviewing both the loan documents and the facts of how the house was "taken over."