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Q.If I owe substantially more on my home than it is worth, Can t I just turn my property over to the lender and walk away, or will I still owe?
A.The answers depends on the type of loan the borrower procured and from whom, and the type of property involved. In all cases, if the loan was used for a vacation home, for an investment property, a rental or as a credit line to pay off other debt the lender can seek a deficiency judgment from the owner if the lender uses the judicial foreclosure process. In such cases, the lender probably won't let the borrower just walk away. Because the issues are complex, we will provide four examples of how California's anti-deficiency laws work in practice. For simplicity, we will refer to the homeowner / borrower in the following examples as H.
Example No. 1: Single Home Purchase Loan:
Assume H purchased a condo to be used as a personal residence with $10,000 down and a loan for $350,000. Now the condo is only worth $280,000 leaving an $60,000 short fall. If H walks, away the bank cannot come after H for the balance owed on the loan because H's loan was used to acquire a primary residence in which H lived. If however, H purchased the condo as a vacation home or income property, then the lender would be able to go after H personally for the $60,000 shortfall.
Example No 2: Refinance:
Assume the same facts as Example No, 1, but add in the fact that a year after H purchased a condo, H refinances and takes out a new loan for $400,000. In this instance, H loses the anti-deficiency protection afforded to California home buyers purchasing a primary residence.
Example No. 3: Two Loans From Same Lender, One to Purchase One for Home Improvement:
Assume H purchases a condo to be used as a primary residence with $10,000 and a mortgage of $300,000 from Lender A. A year later due to increased property values, H gets a second mortgage for $50,000 to make improvements from Lender A. After some time passes, H defaults on the loan. If Lender A initiates judicial foreclosure proceedings, Lender A will be able to obtain a deficiency judgment on the second mortgage used for home improvements, but not the first. If Lender A, however, initiates non-judicial foreclosure proceedings Lender A cannot obtain a deficiency judgment on either loan.
Example No. 4: Two Loans Different Lenders: One To Purchase and One For Home Improvement:
Assume H purchases a condo to be used as a primary residence with $10,000 and a mortgage of $300,000 from Lender A. A year later due to increased property values, H gets a second mortgage for $50,000 to make improvements from Lender B. After some time passes, H defaults on the loan. If Lender A initiates non-judicial foreclosure proceedings, Lender A is not entitled to any deficiency because the loan provided by Lender A was used to acquire a primary residence. However Lender B may be entitled to sue H for the deficiency because the second mortgage was used for improvements. In this case, either H or Lender B could win a lawsuit because Lender's B right to seek a deficiency judgment against H is not a matter of law, but a matter of equity. Lender B will argue that it did nothing wrong and could not force Lender A to file a judicial foreclosure. H will argue that Lender B should never have loaned the money, that it relied on inflated appraisal values, that it did not verify H's income and so on.
As you can see California's anti-deficiency laws are quite complex and fact dependent. Anyone considering a short sale, foreclosure, or walking away from their mortgage who is concerned about protecting other existing assets and/or future income should seek the assistance of a licensed California real estate attorney.
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