California Real Estate Law - Is a home equity loan non recourse

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Real Estate Agent with McConnin & Company Realty

Here is a great question I got the other day from an on the ball Realtor.  I have told him I am going to research the case law to pin this question.  I already have my basic answer but if Indymac were coming after me I would not feel too comfortable with out some case law.  I will get to it and report it here as soon as I have time to look it up. 

In the mean time, how would like to make the banks argument and who would like to make the homeower's argument.  And what does a sold out junior have to do to recover?  And, finally what does this case mean if you are attempting to negotiate a short sale in san diego or some other california city?

 

Is Indymac Bank bluffing?

A home buyer got 80/20 purchase money financing for an owner-occupied single family residence in CA (nonrecourse, right?). The 2nd TD was done by Indymac Bank and its terms were written as a HELOC which started its life 100% maxed out with all the purchase money HELOC funds going to the home seller, none to the buyer/HELOC borrower.

Now, 2 years later, a Notice of Default has been recorded and the property is worth less than even the 80% 1st loan.

Jon Honish with Indymac Bank, the owner of the 2nd TD, tells me their corporate attorneys will pursue a deficiency judgment against the borrower after the 1st TD forecloses. Is he bluffing or is there a precedent supporting this legal argument of which I am not aware?

 

 

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Location:
California San Diego County
Groups:
California Short Sales, REO's, and Foreclosures
Tags:
foreclosure
sold out junior
san diego short sale
non recourse

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Rainmaker
54,771
John McConnin
McConnin & Company Realty

In situations like your daugthers we do a cost benefit analysis.  

There is a risk BofA will come after her for the entire amount of a recourse junior loan. 

There is a chance they will never pursue your daughter. 

If they do pursue it is likely they would settle for a percentage of the amount owed.  

The key is to determine how proactive to be and when to enter into  negotiations.  

August 29, 2011 02:43 PM
Rainmaker
54,771
John McConnin
McConnin & Company Realty

Thanks for the comment about deeds in lieu.  

Back in 2007 (and prior) we negotiated a quite a few deeds in lieu.  Now they are far more tricky.  

1. The lenders now believe you should provide a road map to your assets before they accept a deed in lieu.  (you have to negotiate really well to avoid this.) 

2. When two loans are involved the second is really just a settlement or short payoff negotiation since the second does not get the deed back.  So the senior typically tells you to negotiate with the second. 

 

August 29, 2011 03:06 PM
Anonymous #86
Anonymous
Tom F.

Thanks again for the constructive feedback. 

August 30, 2011 12:02 PM
Anonymous #87
Anonymous
Elle

If a property is currently worth $500K and the first lien on the property is $600K and the non-purchase money HELOC is $100K.  Can a consumer just pay on the first and ignore the second idefinitely?  It seems unlikely the property will ever have value enough to cover any part of the HELOC.  What rights does the second have agains the borrower?  Can they release the lien and file suit for breach of contract?

December 13, 2011 10:30 AM
Rainmaker
63,398
Barry Shapiro
Team VC Online, Keller Williams Realty

Elle ~

The 2nd mortgage holder does not need to release the lien, and will not any time soon.  Depending on the circumstances, the 2nd lien may be willing to negotiate for a lower payoff -- i.e, in the case of a short sale or if you are able to convince them they are better off with less cash now rather than waiting for an unknown future payoff.  What will unfortunately happen is that the interest on the 2nd will balloon every month you do not pay, along with late fees.  As long as the lien is secured by real property, and as long as you keep making your payments on the first mortgage, the 2nd will actually gain a larger piece of the pie as time goes on (and the the first is gradually paid off).  I recommend you seek legal and tax advice immediately.  The best plan may be to negotiate a reduced payoff now, while you are still current.  Good luck!

December 13, 2011 10:46 AM
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John McConnin

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Additional Information

Short sales in San Diego and Orange County from a Carlsbad California Real Estate Attorney and Broker.