Deficiency Judgment

[SD Renter]

I had a pre-foreclosure listing with a $530k 1st mortgage and a $100k 2nd. I found a buyer willing to pay $540k, a fair price for this distressed sale. With closing costs, commission, and termite work, the 1st was to net $495k, and I offered $4k to the 2nd.

The 2nd said “no” with the full knowledge that they would get zilch from the 1sts Trustee Sale. Why would they choose zero over the $4k I offered? Because the 2nd mortgage was NOT a purchase money loan, and they know that, per California state law, they can get a deficiency judgment in court against the debtor for the FULL $100,000 they are owed. I believe they will be able to collect a lot more than $4k from that judgment.

NOTE 1: Any loan created on the day a property was purchased CANNOT get a deficiency judgment, unless the lender does the 12 month judicial foreclosure process which is extremely rare.

NOTE 2: Any loan that forecloses non-judicially with the 4 month Trustee Sale process CANNOT get a deficiency judgment.

But all those upside down homeowners facing foreclosure who refinanced a 2nd mortgage or ran up a (non-purchase-money) home equity line of credit tab, will very likely be on the hook for the FULL AMOUNT of that 2nd mortgage loan, if the 1st mortgage goes all the way to foreclosure.

If the homeowner is really smart and can afford to keep making payments on the 1st mortgage, they’ll be safe. If the 2nd mortgage is the only one not getting paid, the 2nd mortgage will be forced to foreclose or let the homeowner keep living in the home forever without ever receiving a cent from the homeowner. If the 2nd mortgage does foreclose, it will likely be non-judicially with a Trustee Sale, so there can be no deficiency judgment (see Note 2 above).

Just thought you’d like to know.

[barnaby33]

How many different types of loan instruments are there? You mentioned, “purchase money,” which I looked up:

A home-financing technique in which buyer borrows from the seller instead of, or in addition to, a bank. Sometimes done when a buyer cannot qualify for a bank loan for the full amount. also called seller financing or owner financing.

What other types of financing common and not so common are there?

Josh

[bubba99]

With judicial foreclosure on the rise, and the new bankruptcy laws, many borrowers could get a double whammy.

First they will lose their home and find that the lender does get a judgment against them for the unpaid balance – and then discover that they cannot just walk away with an “old style bankruptcy”. Many families could be left paying for bad real estate mortgages for the rest of their lives.

[Anonymous]

bubba99 – My wife and I were just talking about that. If the “double whammy” you described goes though, then it could result in a modern day slave labor. If someone had to walk away from their house and the bank sold it and there was 100K left owed and the people had to pay that back, @ 6% it would take a person 11.5 years to pay it off paying 1,000 a month (10% 18 yrs.) Add that to their rent and you are close to the payment that they couldn’t handle in the first place. People won’t be able to afford to make the payments and will sink farther into debt. It wasn’t to long ago when people were “slaves” to American companies. As the old song goes “You load 16 tons whatta ya get? another day older and deeper in debt.” Who knows, maybe the bank will allow a negative amortization loan on the balance these people will owe them. =)

[Author]

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