By Tiffany Norman

As a Real Estate attorney that assists clients with foreclosure prevention and foreclosure alternatives, I often give advice to borrowers contemplating allowing their property to go to foreclosure, or doing a short sale. The most important factor they consider is if they will owe any money on the loan(s) after a short sale or a foreclosure. This article will discuss both.

Anti-Deficiency Laws

A short sale occurs when a borrower puts their property on the market for less than what they owe. It is not uncommon for a home to appraise for $500,000.00, but have a mortgage payment for $700,000.00, meaning their home is underwater. The difference between the two numbers is called a “deficiency” and in the past a lender could obtain a deficiency judgment against the borrower that short sold their property.

Of course, the last thing any homeowner wants is to owe $200,000.00 for a home they no longer own. Luckily, in the past couple of years in California the Senate has stepped in to help borrowers by preventing deficiency judgments. Current legislation makes it so the lender cannot obtain a deficiency judgment even if the collateral is insufficient to cover the debt. (CCP §580a-d and Senate Bill 458, which amended CCP § 580e)

In order for a short sale to be approved on a property that has more than one loan, both lien holder (lender) of the first and second loan has to agree to the short sale. Often, the second lien holders are the most difficult to work with and will want money to release their liens. Why? In the past the borrower could repay the second lien holder money for the second loan after escrow on the short sale. Because of new law, this is no longer the case.

Thus, if the second lien holder does not get some money from the borrower, purchaser, or first lien holder, they may not release their lien, and the borrower cannot sale their home. Instead, the house will go into foreclosure. As can be seen below, this could mean the borrower could need to repay their entire balance on the second loan, even if the property is no longer in their name. For example, if the second loan is for $100,000.00, and your home is foreclosed on, depending on your loan, you could owe the entire $100,000.00. Remember, it all depends on the type of the second loan.

If you decide to short sale your home, there will be taxes owed. Talk to an accountant, or tax attorney, knowledgeable in this type of law. Do so before deciding if you want to short sale, or have your home foreclosed upon.

Foreclosures

This article discusses non-judicial foreclosures. In California, we have both judicial and non-judicial foreclosures. A judicial foreclosure occurs in court, and begins with the filing of a lawsuit. A non-judicial foreclosure occurs when the home is sold at a Trustee sale on the courthouse steps. A borrower will know if they will be in a Non-Judicial Foreclosure when they receive a Notice of Default, instead of a legal Complaint. Since 99%, or more, of the foreclosures in California are non-judicial, this article will focus on them.

For many people facing a foreclosure, the situation they are in is so difficult, they don’t know who to ask for help, or think they can walk away from their home, and from their debt. As can be seen above, this is not always a good idea. You need to first determine if you will be subject to a deficiency. Thus, the best thing to do is to consult with an attorney. In as little as an hour, they can explain your options, your loans, and your legal rights, and remedies.

For my clients, the loans I focus on for the deficiencies are the second loans. The types of loans are purchase money mortgage, HELOC’s, and refinanced loans. Depending on the type, a borrower may not be liable for any deficiency, at all. This could mean a borrower may want to have their home foreclosed on, which could give them more time in the home, or they could negotiate a cash-for-keys offer. If a borrower would prefer, for credit or job reasons, to do a short sale, the borrower may not need to offer much money for the second lien holder to release the lien. After all, if the second lien holder gets some money, that is better than nothing.

However, if the second lien holder has a right to a deficiency, they can try and collect on their debt. How would the second lien holder collect their debt? First, they may send letters and make calls. Next, they may file a lawsuit against the borrower for breach of a contract. The lien holder has four years to file the lawsuit, and strategically may wait the four years, in hope that the borrower’s financial situation has improved, and then file a lawsuit to collect on their debt. Once the suit is filed, the borrower would only have 30 days to respond to the lawsuit, by, hopefully, hiring an attorney. If they do not respond, the second lien holder could have default judgment entered against a borrower, which opens up a lot of problems for the borrower. Since the judgment can be renewed for the next 20 years, a lawsuit cannot be ignored. However, even if a borrower responds to a suit, they have little defenses, so could end up settling for half of the amount owed, which in this example is $50,000.00. Thus, it is imperative for a borrower to consult with an attorney before a foreclosure, or short sale occurs.

Conclusion

Depending on the type of loan a borrower has, changes their situation considerably. In order to determine if you could be liable for a deficiency, consult with us.

Tiffany R. Norman, of trn LAW ASSOCIATES, is a Bay Area foreclosure prevention attorney and Bay Area bankruptcy attorney. She litigates cases and allows borrowers to keep their homes. On three separate occasions she was the key speaker at the San Francisco Bar Association. She can be contacted at 415-823-4566.