When I bought my home, it was an 80/20 deal....the HELOC was used to secure the purchase of my property. However, a year after purchasing my home, I took $13k out of my HELOC to buy an engagement ring for my soon-to-be wife.... is my loan still non-recourse? I should mention that I'm in the latter stages of the foreclosure process (notice of default filed recently), and BOTH loans are through B of A (formerly countrywide)
Thank you to anyone who can help!!
A special circumstance applies here in California for junior loans that are "purchase money loans." If they were taken out to purchase the borrower’s property, then the lender has no right to pursue the borrower for the amount owed - their only remedy is the property, even if the property was foreclosed by the first loan holder. So borrowers have special protections if the loans they were given by the lenders were used to buy the property.
Unfortunately, a lot of lenders are from out of state and do not realize the unique protections provided to property owners with purchase money loans here in California. So they try to intimate borrowers with collection letters and with threats of wage garnishments as a way to coerce payments.
And the big mistake homeowners make is turning a "non-recourse" second loan into a "recourse" loan by refinancing it. A non-recourse loan is a loan that the bank can only look to their secured interest.
So how is a second mortgage a non-recourse loan? Simple, it was "purchase money" for your property. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your property are non-recourse. It's as simple as that.
So, before even thinking of walking away, the borrower must first determine if the loans are purchase money loans or not – this is critical to whether or not the junior lien holders can pursue the borrower for a judgment. Second, if the loans are not purchase money, then the borrower must do everything possible to prevent the first lender from foreclosing and creating a sold out junior lien holder, that can then pursue the borrower with a lawsuit to obtain a judgment for the amount of the loan.
Your HELOC is part purchase money and part not purchase money. Any portion of the HELOC used to purchase the property is considered purchase money instrument, and the lender will not be able to perfect a deficiency judgment as to that portion. The balance of the HELOC that was taken out over the time since escrow closes is not purchase money, and the lender can obtain a judgment against you for that portion.
My advice to someone who has tried to save their home through a modification but was unsuccessful is PLEASE, PLEASE, PLEASE do something to settle the HELOC BEFORE it’s too late. THEY WILL WORK WITH YOU but you are much better off trying to work something out BEFORE the HELOC is sold out of the property by the first’s foreclosure. Once it is released, they are more likely to want substantially more money. I know of cases where they have been settled for 1-3% of the outstanding balance (or $1,000 - $5,000 etc.).
And if you negotiate with the first lender to do a short sale, make sure the HELOC or second is onboard. Otherwise you might have resolved your issues with the first, but after the short sale the HELOC or second will serve you with a lawsuit. Make sure to negotiate with the second lien holder prior to the short sale for debt forgiveness....
Finally, if the lender receives less than the amount of its loan from the foreclosure sale, then it will send you a 1099 for the difference. The fact that you, in effect, paid less than the amount you owed is called mortgage debt relief. If you receive mortgage debt relief, then this is considered taxable income.
The federal congress has exempted, for the short foreseeable future, any taxable income that would result from mortgage debt relief on your primary residence. If this is the house that you and your family live in, and it is your primary residence, then you will not have to pay federal tax on the 1099 you receive for mortgage relief.
Call my office as I think you should obtain an injunction to gain time to negotiate with the second lien holder.
The 2nd sounds like it is a recourse loan, meaning they can pursue a judgment if (when) the first foreclosures. There are things you can do to be proactive and substantially diminish (possibly eliminate) the chances of the lender pursuing such a judgment. It is best to address the situation now before the first foreclosures. It's better to spend some resources on it now, instead of waiting for a problem to develop. My office handles these types of matters and we can offer you additional information and a free consultation if you like. Good luck.
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