I have an 80/20 loan in a non-recourse state. If I refinance my 1st with the 2nd subordinating, does the 2nd still keep its "non-recourse"

Asked by palmer, Los Angeles, CA Mon May 16, 2011

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Steven Ornel…, Agent, Fremont, CA
Mon May 16, 2011
Palmer:

As you know, CA is a non-recourse state; however, I just want to first make sure you also understand that refinancing the first removes this protection and opens you up to a potential deficiency judgment should you default.

Now regarding your Second loan, theoretically, a simple "rate and term" refinance of the first loan coupled with a subordination leaves the Lender in the same or better position (due to default risk reduction brought on by an assumedly lower first loan payment.) HOWEVER, I was unable to find ANY reliable source on whether subordination removes the non-recourse protection of a purchase money second. Given the flawed reality that a "rate and term" refinance of the first removes non-recourse status there's really only one option:

Call the Second lender and ask. If they say subordination does not remove non-recourse status request a copy of their Subordination Policy to confirm!

Best, Steve
1 vote
Ron Thomas, Agent, Fresno, CA
Sun Jul 17, 2011
It sounds like there might be a CATCH 22 in that new revision:

I doubt that there are too many instances where the Homeowners is defaulting on the 2nd and NOT the 1st.

Also, notice the wording about the "Agreed Upon Amount"; usually the 2nd lien holder hasn't agreed to anything; they are simply told that they are getting NOTHING, and that leads to the Shortsale being held up.

It sounds like there is a lot of GRAY area here. I would not personally want to put it to the test:
What will happen when the 2nd Lienholder notifies the 1st Lienhold that you are defaulting?
0 votes
Steven Ornel…, Agent, Fremont, CA
Sun Jul 17, 2011
@ Rudi,

Yep, you are exactly right, thanks for underscoring that very important point!

The prior version of SB458 (NOT what has now been made law by now Governor Brown) extended existing anti-deficiency protections to cover the REFINANCE of purchase money mortgages that include debt (cash out) incurred to acquire, construct or improve the home. .


@palmer,
If you are still considering your options please consult professional help before taking any action so your specific case can be reviewed.

-Steve
0 votes
Ron Thomas, Agent, Fresno, CA
Sun Jul 17, 2011
California is a Non-Recourse State.

One of the exclusions is that the Loan not be refinanced>

So your FIRST is not even Non-Recourse.

You should do your homework on Non-Recourse.

Good luck and may God bless
0 votes
Rudi Hofmann, Mortgage Broker Or Lender, El Segundo, CA
Sun Jul 17, 2011
@Steve,

I may be wrong, but I believe this ruling is only on purchase money transactions. If the borrower did a cash-out refinance or borrowed money on a HELOC, this ruling doesn't apply.

Happy funding, Rudi
Web Reference:  http://www.umboc.com
0 votes
Steven Ornel…, Agent, Fremont, CA
Sun Jul 17, 2011
palmer:

You may be interested in this legislative update:

"CA Senate Bill 458 Now Prohibits 1st/2nd Deficiency Judgments"
http://tinyurl.com/3nommgr

My suggestion that you seek professional guidance from a CPA and Real Estate Lawyer still stands.
0 votes
Steven Ornel…, Agent, Fremont, CA
Tue May 17, 2011
Palmer: My advice is that you seek guidance from a CPA and Real Estate Lawyer!
0 votes
palmer, Home Buyer, Los Angeles, CA
Tue May 17, 2011
Thanks for your answers. I plan on keeping the home for some time. But i am trying to solve the 2nd loan. since it is completely underwater, I may have to default on the 2nd. So I am trying to make sure that I have some legal protection. Do guys help people settle 2nd loan once they have defaulted on it?
0 votes
Steven Ornel…, Agent, Fremont, CA
Mon May 16, 2011
Congress actually passed SB 1178 last year but it was VETOED by then Gov. Schwarzenegger on 09/30/10; however, CAR-sponsored SB 458 revisited the “anti-deficiency” issue of SB 1178 (Corbett, 2010).

As introduced SB 458 WOULD HAVE extended existing anti-deficiency protections to cover the refinance of purchase money mortgages that include debt (cash out) incurred to acquire, construct or improve the home. CAR and the "lender groups" reached an agreement to amend SB 458 to instead expand the provisions of existing law (SB 931 of 2010) which became effective this year.

Existing law (SB 931) requires a first mortgage holder to accept an agreed upon short sale payment as full payment for the outstanding balance of the loan, but does not apply to junior lien holders. SB 458 will extend the protections of SB 931 to junior liens effectively providing that any lender that agrees to a short sale must accept the agreed upon short sale payment as full payment of the outstanding balance of all loans.

Best, Steve
0 votes
Emily Knell, Agent, Huntington Beach, CA
Mon May 16, 2011
Wait to refinance after June 1st 2011. For more information you can google this bill, SB 1178, which DID pass, so refinancing your purchase money loans will give you the protection you're inquiring about should you default in the future, the bank now has a non-recourse loan even though you've refinanced. This applies to your 2nd lien as well.

Looking at your other question, I see you're home is underwater. Have you been able to find someone to do a Short Refinance? Maybe you've discovered that a "short pay refinance" isn't what you thought it would be. Banks are not refinancing for people who are underwater. There are some products available for this, but NOT if you're underwater by more than 20%-25%.

Some companies that are offering anything they call "Short Pay Refinance" are ones where an investor is actually going to negotiate with your lien holders for 20% off of current fair market value to sell your home as a Short Sale, then they're the ones on title & they create a new payment for you, oftentimes at 9% interest, even though that sounds high, likely it is less than what you were paying with your higher mortgage balance.

Some of these companies make it extremely difficult for you to refinance it back into your name within 1-2yrs & if you default at all with them, they'll keep the deed & you'll basically just be a renter.

If you'd like to talk more about this, please email me directly.

EmilyKnell1@yahoo.com
562-430-3053 cell
Realtor Since 1996
Distressed Property Expert



EmilyKnell1@yahoo.comj
562-430-3053 cell
Realtor Since 1996
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