You can’t hand your keys to the bank anymore

[Anonymous]

Deficiency judgements can be sought on second trust deeds if they are not purchase money, and the lender uses a JUDICIAL foreclosure.

California has a one cause of action rule. If lenders use non-judicial foreclosures (trust deed/auction on the court house steps) they may not then go to court and seek a deficiency judgement. This is the one action rule.

One the other hand, if a lender forecloses through court action, they can get a deficiency judgement and go after other assets of the borrower.

However, this second course of action is cumbersome and slow for lenders. They have to evaluate the creditors liquidity and predict if will be there at the end of a lawsuit. They also have to file and prosecute the lawsuit.

Non-judicial forclosures are much easier and efficient for lenders to clear out bad loans, so they tend to use them instead.

Prediction: Watch for lenders to sell some of these underwater second mortgages to specialists who use judicial foreclosures to recover 100% + attorneys fees.

[Bugs]

Wow, I never thought about it before but I think you’re on to something there. Back when typical home prices were below $250k a short sale might involve a $25,000 loan loss in addition to the loss of the borrower’s downpayment. A $15,000 or $25,000 loss is bad, but it’s not enough to justify going to court.

Now that prices are starting at $500,000 and many loans start out with no equity the intial loss to a lender with a 10% deficiency – which is where we are right now in some markets – starts at $50,000. A $750,000 purchase puts it up to $75,000. Those kinds of numbers start to make it worthwhile to skip the short sale or to sell the position off to a collector. It only becomes more viable as more markets go negative.

[powayseller]

I’ve seen several houses that are bank owned. Do you know the one on Country Creek we discussed? The realtor told me he had an offer. This was a few days before the auction. He was sure the bank would take it as a short sale. But the property is showing up as bank owned on foreclosure.com. Do you think this is because they will go after the difference from the borrower? A short sale would preclude them from doing it. The house just a block away, on Twin Peaks Road is also bank owned. That one was only listed on the MLS a few weeks ago, presumably by the lender.

In both cases, why did the borrower decide to let the bank take the house, rather than sell it themselves? (Country Creek was listed, but obviously not motivated enough to sell)

[Bugs]

Country Creek was owned by a couple of realty agents, wasn’t it? If they were among those agents who subscribe to the NAR party line they wouldn’t have believed their chances for loss would be real. The whole experience of both losing their income and their house would have literally caught them by surprise in the face of all the information they had been fed to the contrary.

I don’t know what the real answer here is, I’m just speculating from the outside.

You know how it is with people who are overextended. In an effort to maintain their dream some of them will sacrifice everything else to keep the house. It only goes NOD when they can’t get within 2 months of being current on their payment. When they list the house for sale a person in this position probably has no cash or credit to bring to mitigate the deficiency close enough to enable the lender to agree to a short sale.

The bank may not want the house but they want the $50,000 loss even less. Attitudes among the banks vary greatly, from conservative to agressive. If their managers and economists are also toeing the NAR party line the bank may not even be that attuned to the true state of the market. None of us can be any smarter than the people and data that we choose to believe.

[powayseller]

I forwarded scowman’s and Bug’s comments to the staff writer whose article started this thread, and she wrote back:

Yep, that’s what I’m hearing — that private money won’t be so forgiving.
Thanks for passing this along.

Mary Ann Milbourn, Staff Writer
Orange County Register

[Author]

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