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Dear Bankruptcy Adviser,
I bought my second home in 2006. It is my husband's
first home. We are having difficulties paying
the mortgage, and our home value has gone down
$120,000. We are thinking of letting it go into
foreclosure. The home is in California, and the
original loan has not been refinanced.
Could the lender require any deficiency payments? What is your advice? How long does the foreclosure
process take?
-- Viola
Dear Viola,
I wish I could say "walk away or stay and pay"
to you, and all would be better. The decision
to walk away from your home is one that no one
should decide for you. That is a decision that
only you and your husband can make.
As an attorney, it is my job to
provide all the options available, and my client
must make the final decision. Usually, the decision
is quite obvious. Sometimes, like now, the decision
is almost impossible.
You should be protected from any second mortgage liability if you did decide to walk away from the
home. In California, homeowners are protected by anti-deficiency legislation when they first purchase a house. The
original loan (or loans if you finance a first and second mortgage) is called a purchase money mortgage, or PMM, loan.
A PMM is a mortgage issued to a
borrower by the seller of the home as part of
the purchase transaction. This means that the
money borrowed from the lender was used only for
the purpose of buying the house. This can occur
with a "piggyback" loan, aka an 80/20 loan, in
which you obtain both a first and second mortgage
simultaneously.
In basic terms, as long as you have a PMM loan and you live in California, then the lender cannot come
after you for any deficiency balance remaining once the house is sold in a foreclosure sale. There is an exception to
this, but it happens in less than 1 percent of foreclosures. You ought to consult with a bankruptcy attorney, even if
you ultimately decide to file on your own.
The foreclosure process takes between six months and nine months from the first time you miss a payment.
The lender will try to contact you via phone calls or letters when you first default on your loan payments.
After a few months of unsuccessful collection attempts, the lender files a public document with the
county recorders office called the Notice of Default. This begins the 90-day period in which you must modify your loan,
find a new loan or bring your loan current.
If nothing improves during that
three-month period, the lender files another public
document with the county recorders office called
the Notice of Trustee Sale. This begins the 21-day
period up to the sale of the house. Some lenders
will work with you up until day 20, but this can
be horribly stressful and you cannot be assured
that the lender will work with you at that point.
The majority of homes are sold after the 21-day
period passes.
At this point, you need to decide what is best for you and your family. While there appears to be nothing
positive that can come of your situation, it is hoped you will make a decision and be able to move forward.
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