The housing market is crashing, many families have felt the strain of loosing one or both incomes.  We are working with a family right now that is loosing their home due to job loss for one and reduced hours for the other.  They could not afford to keep the home with their wages, even with a loan modification.

I want to share this families  experience with our readers.  We get so many questions relating to Jr. lien holders and recourse or non recourse loans.  We’ve talked to many reputable attorneys at length on the subject and have learned some very interesting and useful information to pass along to our clients.  But as we always remind our readers and clients, we are not attorneys so please consult with an attorney that specializes in Real Estate Law.

Mr. and Mrs. ” Smith” have a first and a second on their property, (Jr. Lien Holder).  The second holds a note for about $150,000.

After long negotiations with both lenders we have hit a road block….

There is no problem with the first accepting the short sale offer, they are ready to release the property from their inventory and avoid having to foreclose.  They have offered the second $2000, the maximum allowed to be paid a Jr. Lien holder accoding to their investor.

Jr. Lien Holder will not accept that pay-off.  They will not release the lien for $2000, they requested the “borrowers” sign a promissory note for the entire balance due.  Well, this was not favorable to the sellers for obvious reasons!

Round Two:

We negotiate a lower amount for the promissory note and present that to the borrowers.  In the mean time they have consulted with an attorney about filing Chapter 7 Bankruptcy.  Their consultation was not what they expected to hear….they make too much money! In their world they are insolvent…loosing a home, lost 2 vehicles to repossession and are still trying to find a place to live that they can afford to rent.

They now are faced with some very serious decisions.

According to attorneys that we have consulted with a Jr. Lien holder has a statute of 4 years to “lie and wait” in other words attempt to collect the balance due them.  This can happen even if they “release the lien” and allow the property sold at short sale.

With that said, even a foreclosure does NOT RELEASE that possibility, unless you are able to file a Chapter 7.

Attorneys will most likely tell you this:  There are two types of foreclosure on real property in California.  Judicial Foreclosures done through judicial (court system) and Non Judicial Foreclosure done by trustee under California Civil Code Section 2924.  Most lenders foreclose Non Judicial as it is relatively fast and inexpensive.  In this case the lender waives right to deficiency against borrower.

For those that don’t qualify for bankruptcy and only have one loan on the property a foreclosure (as long as the lender uses non judicial) appears to protect you from the lender going after the deficiency.

Now if your following this, and asking yourself what if I have a second on the property???  (Most of our clients here in California do)

Again, not being an attorney….

Unless you are able to file BK to release your debt the Jr. Lien holder has 4 years to “lie and wait”.  So a foreclosure still leaves you open to that Jr. Lien Holder balance.

We have been working with more and more homeowners recently that have made the decision to Short Sale their home due to the fact they just want to cut their losses now and rebuild instead of back peddling for years before they regain any equity.  To date, not a single lender has refused the Short Sale.  Although for some of our clients with means, the Jr. lien holder has required a “settlement” either paid over a period of years with zero interest,  or a lessor amount if paid at close of escrow.  These settlement terms have insured the sellers that they will not be sought after for a deficiency judgment.  For some, a small cost to “release” in most cases several hundred thousand dollars of negative equity.

Something to think about……