Re: Forclosure - Is the second house at risk?

Posted by Julio Martinez-Clark on February 26, 2008 at 09:19:34:

In Reply to: Forclosure - Is the second house at risk? posted by Jack on February 25, 2008 at 22:57:22:

Jack,

Yes, the lender could potentially go after you for any unpaid debt by obtaining a mortgage deficiency judgment against you. This deficiency judgment could be collected by garnishing your wages, seizing your personal and real assets, and bank accounts.

If the loans in your primary residence are "purchase money money loans", then you could be protected from having a deficiency judgment against you under the "California Foreclosure Rules":

From Sandiegopredatorylending.com:

"THE CALIFORNIA FORECLOSURE RULES

"1. THE PURCHASE MONEY RULE:

In California, a lender who loaned you money to BUY your home, which you ORIGINALLY moved into as your primary residence, cannot do anything other than foreclose. This means if the foreclosure sale does not pay all “purchase money” loans, those lenders cannot sue you for the unpaid balance. Most importantly, this includes second mortgages used in many 80/20 100% financing deals. If you REFINANCED any of these loans, or paid down purchase money HELOC and drew down on it again, this rule does not apply.

"2. THE ONE ACTION RULE:

In California, a mortgage lender can only take one action against you: A non-judicial foreclosure, or a judicial foreclosure. The result of a non-judicial foreclosure is just like the PURCHASE MONEY RULE, a lender can only sell the property and pay the loan. If the sale does not pay the mortgage, the foreclosing lender cannot get the unpaid balance from you. However, the lender can get the balance from you in a judicial foreclosure. The good news is judicial foreclosures are too uncertain and costly for lenders that they are almost non-existent. BUT, (pay attention, this is important) if a junior lender’s security interest is wiped out by a senior mortgage foreclosure, the junior lender can obtain a deficiency judgment for their unpaid balance because they have not had their ONE ACTION against you yet (subject to the PURCHASE MONEY rule of course). This situation is very common these days for that second mortgage you used to remodel the kitchen and bathroom, or bought that Escalade, or refined a previous second mortgage.

"3. THE CANCELLATION OF DEBT RULE:

Both the IRS and California tax you for the amount of debt that is CANCELLED in any given tax year. Debt is cancelled only when a lender has given up on its right to collect the debt or they are barred by law from collecting the debt (think PURCHASE MONEY & ONE ACTION rules). HOWEVER, if the debt cancelled was a “Purchase Money” loan (see above) the debt cancelled is treated as a sale of your residence, subject to normal homeowner exclusions. This is because the loan is deemed to be non-recourse and therefore nothing has been cancelled.

"4. THE BANKRUPTCY & INSOLVENCY EXCEPTION.

Both the IRS and California exclude cancelled debt from your income to the extent the debt was CANCELLED in bankruptcy and you were insolvent; BUT ONLY TO THE EXTENT OF YOUR INSOLVENCY!!!! You are insolvent when your debts exceed your assets. Assets include IRA and pensions. GET A CPA TO HELP YOU HERE. YOU WILL NEED IT! DON’T BE STUPID AND TRY TO FIGURE THIS OUT YOURSELF!

"5. THE FIRST ACTION RULE.

Not to be confused with the ONE ACTION RULE, this rule says a secured creditor must seek to recover the secured property before suing you for non-payment. This means a second or third mortgage will have to wait until the first or senior mortgages foreclose before they can sue you for a deficiency."

I hope this helps,

Julio Martinez-Clark
www.Beat-Debt-Collector.com

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