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Second Mortgage after foreclosure

Downey, CA |

I purchased a house in 12/2005 with no money down. I got 1st & 2nd mortgage (20%-80&) interest only. In 05/2008 I default on both mortgages after trying an unsuccessful short sale. The 1st mortgage was accepting the short sale but the 2nd never accept any offer. The house end up been sold on foreclosure for 35% of the purchased price and the 1st mortgage reported on my credit report "Credit Grantor reclaimed collateral to settle defaulted mortgage". The 2nd mortgage is still showing as late on my credit report. I never got an equity or credit line on the property. I live in California and I'm wondering of the 2nd mortgage can come after me to claim what I own to them even after the foreclosure. Also, for how long they can keep showing the debt on my credit report, if it is even possible?

Attorney Answers 3

  1. Best answer

    Sounds like you are in luck - since it was a purchase money note, the second lender cannot go after you.

    Every property owner that has obtained a mortgage has an option embedded in that mortgage. That option is the right to default on the mortgage. A mortgage note is a contract, and its terms give borrowers the right to stop paying and to default on the note. If the option is exercised, the lender has the right to foreclose and take ownership of the borrower’s home.
    California has anti-deficiency statutes that ensure that lenders stick to their bargain. The anti-deficiency statutes apply to any property, primary residence or rental (investment property), even to commercial property. What they say is that if a lender conducts a trustee sale on its loan, then its recovery is limited to the property. Any balance left over is eliminated.

    A lender can forego the foreclosure by way of trustee sale and instead conduct a judicial foreclosure through the courts. This requires hiring a lawyer, a lawsuit and much more time and expense. I have conducted judicial foreclosures for lenders when they knew the borrower had other assets. In this case, a judgment is obtained and the lender can execute on its judgment lien, ultimately ending up with the property as well as the right to pursue the borrower for the deficiency.

    Since 99% of homeowners losing their homes have no other assets and would simply file bankruptcy to get out from under the judgment, lenders use the less expensive and abbreviated process of the trustee sale to foreclose on the property. In the case of properties with just one loan, that ends the process there. Once the lender forecloses and takes ownership of the property, the debt is extinguished.

    In the case of properties with a second or third loan, if the first lender (or more senior lender) forecloses, then they become sold out. In this case they can proceed against the homeowner for the amount that they are owed. The anti-deficiency statutes do not protect a borrower from judgments by a sold out junior lien holder.

    However, 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 primary residence, 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 their primary residence.
    Unfortunately, a lot of lenders are from out of state and do not realize the unique protections provided to homeowners 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 home. 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 home (note: not second home or investment properties) 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.

  2. Start with this thought. Each of the mortgages was delivered to a lender as collateral for a Note. The 2nd Note is still outstanding and the "holder" of the Note can still come after you up to the period of the statute of limitations. It begins to run the last time you make a promise to pay (like when you phone rings and a bill collector calls). There is no hard and fast rule on how long it will stay on your credit report, but at least 7 years is a good guess.

    The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the Commonwealth of Pennsylvania. Responses are based solely on Pennsylvania law unless stated otherwise.

  3. If both the mortgages were purchase money and you meet the rules of CA's anti-deficiency statute, it protects you from the 2nd lender coming after you (well, they could sue you and you'd have to defend yourself, but your chances would be good), but they can still report the delinquencies to the credit bureaus, and those negative reports will probably remain for 7 years.

    Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.

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