I would suggest asking your Attorney or Accountant that question. I would hope not!

Hello Teryl. You have to clearly distinguish between foreclosure and short sale. In CA most foreclosures are done by way of trustee sale which cuts off the foreclosing lender's ability to pursue the borrower for a deficiency judgment unless certain exceptions apply (e.g., borrower committed waste, fraud, abandonment of the property). If the lender wants to preserve the right to sue for a deficiency judgment, the lender has to foreclose via judicial foreclosure which takes a lot longer and will most likely cost more than the trustee sale route. If the foreclosing lender chooses the trustee sale, it does not matter whether your loan was a recourse or non-recourse loan. However, if you have a second loan (junior lien holder) and the senior lien holder forecloses through trustee sale, it does matter whether the second loan was a purchase money loan or a loan that was obtained after the original purchase. If the second loan was a non-purchase money loan, the second lien holder can try to collect on the now unsecured promissory note and if the second lender chooses to do so and obtains a money judgment, the lender may choose to record the judgment in the county in which you have your other house and it would appear as a lien against that property. The lender may also forgive the loan and issue a 1099 and it is possible that you won't know what the lender decides to do until the statute of limitations prevents the collection on the promissory note.

If you negotiate a short sale with the lenders, none of the anti-deficiency laws apply since there's no foreclosure. Unless the lender(s) expressly release you from all claims, they can try and recover the difference of what was owed and what they received from the short sale.

I hope this helps.

Good question for an attorney: Sometimes they can and sometimes they can't.
So the answer is both yes and no and neither a yes or no and both.
Was your bad loan a purchase money loan for an owner occupied home? Or was it a cash out refi on an investment property? These may be treated differently. Was it something other than one of those two types?

Teryl:

Generally speaking, in California, a Deed of Trust foreclosure goes after the underlying collateral or the home and a judicial foreclosure can go after any and all assets. A short sale is a negotiated deal with the bank. They can look to all or some of your assets, as they see fit. They may also require that you sign a note to them for all or part of the deficiency.

Specifically speaking, the above generalities do not apply to ALL loans. Several issues that can change the scenarios are (1) purchase money vs. refinance; (2) owner occupied vs. investment; (3) cash out vs. no cash out refince; (4) 1st TD vs junior TD; (5) significant other assets vs. these two properties are your only assets; etc. You should take all your documentation to an attorney or perhaps to your lender (especially if you are considering a loan modification) and have them analyze your specific situation.

Hope you can find your way out of this problem with minimal damage. Dare to Dream.

Shel-lee Davis
Real Estate Consultant
RE/MAX Palos Verdes Realty