It’s all about recourse vs. non-recourse.

In California, a purchase-money loan is usually non-recourse (the lender is entitled to foreclose on the house, but cannot pursue the borrower any further). In some states, mortgages are recourse, so the deficiency follows the borrower even after the house is foreclosed on.

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Note that in some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). Almost all HELOCs and home equity loans are considered recourse loans and lenders for these loans may sue borrowers to recoup loss. (Except in some cases where the second mortgage lender forces the foreclosure. See: HELOC Foreclosures). There has been some speculation that mortgage refinances do not constitute “purchase money” loans. However, there have been no cases to determine this issue one way or the other.

http://www.helocbasics.com/list-of-non-recourse-mortgage-states-and-anti-deficiency-statutes/

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I’m guessing very few FBs realized they were trading non-recourse for recourse loans when they refi’d (especially if they “cashed-out”) and HELOC’d their homes.

This debt is selling in the secondary market right now, and I’m guessing some smart investors are going to start pursuing these borrowers over the next few years. They’re buying these loans for just a few cents on the dollar right now.

They have every right to go to the courthouse steps and bid higher that the first mortgage holder to “protect” themselves–if they think it’s worth it. Then they just have to pay the 1st and (try to) resell it.

But I haven’t heard of any even doing that–they’re just writing it off as a loss. They didn’t want to eat what they already have into it PLUS the 1st, in this poor market.

I don’t understand what recourse they have in this situation, but hey! I’m no lawyer….

http://www.up2daterealestate.com/2009/04/20/the-short-sale-shakedown-continues/

I’ve had people tell me that their lenders told them to stop paying in order to rework the mortgage. The lenders tend not to modify loans unless the borrower has already stopped paying. I wonder if there is a clause in the contract that triggers some benefit to the lender in this case…anyone know of something like this? Otherwise, why are they telling their customers to stop paying them???

Thanks for filling us in on re recourse loans, Jim. That’s very good news. No way those lenders should be hung out to dry as the FBs walk away with no consequences. Their credit was likely already bad, so any further credit hit won’t really matter, especially when “everybody else is doing it.”

What is amazing to me up in the areas around me is that only 1 in 10 homes are actually being auctioned when they hit their auction date, the rest are being postponed all the while Pre-foreclosures are building and active inventory is shrinking.

We are checking the listings from the MLS directly.

Also the listed field isn’t very accurate in some counties due to how they account for listings.

What I have found for looking up in Ventura County up north is for every 1 home on the market (or already sold) there are 2 that haven’t got on the market yet.