In this week's edition of ANH Legal Group Bankruptcy Blog, we will second home mortgages and the lender's enforcement of the same. In the past few months, we have received many calls lately from California homeowners (and even some commercial business owners) asking us if their lender can hold them liable for their second mortgage in California. And if so, can they sue them on the note without first seeking the foreclosure route.
At issue, California's One Action / Security First Rule of California Code of Civil Procedure Section 726(a) and its interpretation. In most cases, a junior lien is not going to foreclose on mortgage that is underwater either judicially or non-judicially. The reality behind the above is that the junior lien holder gets paid after the first mortgage holder (the senior lien holder) is pain in Non-Judicial Trustee sale or following the Court ordered sale of the property in a Judicial Foreclosure. In the current declining property market, most second mortgage holders are not often left holding a lot of “security” for the loans they gave to borrowers. As such, the junior lien holders have very little recourse if their lien has no value.
In a Chapter 13 Bankruptcy case, a homeowner is able to avoid the junior lien on his/her property if the lien is no longer secured by the property because of devaluation.
In order to avoid foreclosures, a homeowner can enter into an agreement with his/her lender to turn over the deed of the property to the bank and walk away. This is call Deed in Lieu of Foreclosure.
In order to avoid foreclosures, a homeowner can enter into an agreement with his/her bank to short sale the property and walk away.