Jingle Mail and 2nd Mortgages

I’ve discussed Jingle Mail several times, which is when a borrower owes more on his mortgage than his residential property is worth, and makes the rational decision to give the house back to the bank by mailing back the keys of the house to the bank.

I’ve been e-mailed and asked via blog comments on what the law is for jingle mail and second mortgages in California. The key question is “Can the banks come after me for the difference between the mortgage price and the market price of the house.”

Let’s have a look at how the law plays out under several typical situations.

In the following examples I use the shorthand “H” for homeowner and “B1, B2” for Bank 1, Bank 2, and so on.

Scenario 1

In 2006 H purchases his residence for $1,000,000. He pays for the house using funds from three sources: (1) a traditional first mortgage for $800,000 from B1; (2) an additional 5-year-ARM for $150,000 from B2; (3) a $50,000 down payment from H’s savings.

The value of H’s house, however, has now dropped in 2008 to $700,000, and he still owes $920,000 on his two mortgages. He decides to stop paying both of them, and the two lenders foreclose, and sell the house for $700,000 at auction.

Can either B1 or B2 go after H for their shared $220,000 loss on the mortgage?

Answer:

No. In this simplest scenario, the borrower is completely protected. He can walk away from his house, and the banks have no remedy other than foreclosing on the house. They cannot sue the borrower, and cannot go after his other assets. California provides no remedy for banks other than foreclosure on purchase money mortgages on residential real estate when the borrower lives in the house.

Scenario 2

H has two mortgages:

– 1st mortgage from B1 that he used to buy his house

– 2nd mortgage from B2 he took out a few months later.

H stops paying first mortgage to B1, which responds with a  non-judicial foreclosure of H’s house. After H moves out and the house is taken by B1, H stops paying his second mortgage to B2. Can B2 go after H’s assets in a judicial foreclosure?

Answer:

Maybe. It was B1’s decision, not B2’s, to proceed with a non-judicial foreclosure for the obvious reason that the slower and more costly judicial foreclosure process would not get it any better a result because the first mortgage was a purchase money mortgage.

But the 2nd mortgage was not for purchase money, so B2 does have a reason to prefer a judicial foreclosure because it could obtain a deficiency judgment. As the California Court of Appeal noted in In re the Marriage of Anthony and Charlotte Oropallo:

It is true that when the security of a second deed of trust is rendered valueless by a prior foreclosure, through no fault or action of the second lender, that lender for equitable reasons will ordinarily be permitted an action against the debtor on the second obligation.

Note, however, the qualifications the Court uses. It does not say “always” but instead says “ordinarily” may a 2nd non-purchase-money lender pursue a deficiency judgment against a borrower. Note also that the Court says a deficiency action “ordinarily” is allowed when the mortgage is rendered valueless “through no fault or action of the second lender.” The remedy is allowed not as a matter of law, but as a matter of equity, and a bank cannot receive the benefits of equity unless its own behavior was equitable.

H, however, might be able to argue that B2 was at least in part (if not mostly or entirely) for the foreclosure. Is B2 known for seeking out and writing mortgages based on inflated appraisals? Did the B2 target homeowners with poor credit, knowing that it could charge such homeowners higher interest rates and more fees? Did B2 actually verify the buyer’s income, or was it a no-doc loan that it bought from one of the dozens of now-bankrupt subprime brokers? Was B2 already equitably compensated for H’s default by charging and receiving above-market interest rates and a host of fees?

Scenario 2 is winnable by either party, or the decision could be split, with B2 being awarded a judgment for a substantial sum, but less than its full loss. In practice, if H puts up a spirited defense to B2’s lawsuit, H will probably either win the case early by

(1) showing a procedural defect in the foreclosure or B2’s pleadings

(2) or proving inequitable conduct on B2’s part.

Failing that, H will probably be able to convince B2’s attorneys to settle for a smaller sum than the amount he defaulted on.

Scenario 3

H buys his house with a mortgage from B1. Some time later, he takes out a second mortgage, again from B1. He then stops paying both mortgages and B1 forecloses on the house in a nonjudicial foreclosure. The sale of the house does not bring enough to pay off the first mortgage, much less the second.

Since the 2nd mortgage was not a purchase money mortgage subject to the protections of Cal. C.C.P. 580b, can B1 obtain a deficiency judgment for the second mortgage in a judicial foreclosure?

Answer:

No. In Simon v. Superior Court, 4 Cal. App. 4th 63 (1992), a bank tried to go after a borrower in a judicial foreclosure on the second non-purchase-money mortgage after it had already taken the property in a non-judicial foreclosure after a default on the first mortgage.

This is good news for homeowners who have a 2nd mortgage they took out later from the same bank they used for their first mortgage. In many cases a bank may not know the size of a deficiency until after it has already proceeded with a non-judicial foreclosure of the first mortgage. At that point, it is out of luck and will have to eat the loss with the 2nd mortgage (or, quite commonly, a HELOC on top of the first mortgage).

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

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12 responses to “Jingle Mail and 2nd Mortgages

  1. Hello,

    Please could you explain what would happen in Scenario 2 in H stops paying 2nd mortgage from B2 (could be both) and B2 forecloses on the house in a judicial foreclosure (could be that B2 forecloses before B1…).

    Many thanks for taking some time on that matter.

  2. What would the tax consequences be for scenario 1? I looked at the IRS page, but it wasn’t too clear. Also, what if it takes 3yrs for the property to sell?

  3. Could you please answer ir give your opinion on what happens if you refinanced and then default on the 1st and 2nd and then short sale your home. I am working on a short sale with my lenders (the same bank on the 1st and 2nd) and I am concerned that even after the short sale is accepted they can come after me for the difference of the value of the home and the short sale price they accepted.

  4. I recently foreclosed on my house in CA, and I had an 80/20 loans, only purchase-money loans, and the second lender is trying to collect now. Apparently, AIG insured the loan (probably paid for by the higher interest rate), and and now AIG is trying to collect. It was a trustee sale, and the second lender was wiped out completely. Now I have a lawyer in Sacramento to help deal with this. The first lender will be lucky to recover 75%. Does anyone else have the same situation?

  5. Would scenario 3 be the same if originally the home was bought on two loans than refied in two loans? The two new loans are with one bank. So then if the first forecloses the second can’t come after you later since it is the same company, am I correct?

    Regards,

    Jason

  6. I posted a comment on this blog, and it was never published. What’s the deal Greg?

  7. duarte: im in the exact situation you are. 80/20 foreclosed on. both loans were purchase money loans. i thought the nightmare was over but now collections is calling on the 2nd $120,000 loan. very frustrating! i keep getting different answers to what they are allowd to try to collect. i guess bankruptcy will be the last step in the process

  8. I am falling under scenario three

    H buys his house with a mortgage from B1. Some time later, he takes out a second mortgage, again from B1. He then stops paying both mortgages and B1 forecloses on the house in a nonjudicial foreclosure.

    however I have two minor differences in my case.

    1. I wasn’t on the 1st mortgage but obtained a HELOC by getting added to TITLE to distribute HELOC funds to 1st mortgage holder to prevent a foreclsousre (In this case my children)

    2. Lender is Senior and Junior HELOC mortgage holder. But neglected to inform me that the property was in foreclosure precedings and lied to what they were going to end up doing with the HELOC and left the HELOC open after the foreclosure without any Written Contract for me to leave it open. Hence 15 months later Charged off the HELOC (While not having any Delquencies on file toware the HELOC.) SInce they told me they were goling to charge it off – I didn’t want to have deliquencies on my record – NO FAULT by me. They Verbally stated they charged off the account based on the Foreclosure Retroactive April 2008. And instead of researching put me into immediate collections agency – with no deliquencies on file nore written notice as to why they charged off the account.

    Am I protected under: Simon v. Superior Court (1992) 4 Cal.App.4th 63,
    although the HELOC remained open after the foreclosure without a new written contract drawn up for me to continue to pay aside from the lack of notification that the 1st mortgage was in foreclosure? In fact: on the foreclosure date in April 2008 they told me my HELOC was CLOSED and Zero’d out and that I would not be effected because the 1st mortgage holder is listed as a valid trustor on my heloc loan documents and requested the charge off since I was not at fault. They subsequently on the day of foreclosure ran my credit report and then lied and kept it open. I presume as a way to continue to receive money from me. This is a unique case where the BANK is severely negligent in their methods to keep me informed on any point. At least a year of lies, twists and ignorance has occured by the bank here.

    HELP!!! I have a collections letter in my midst and I presume I should send a Cease and Desist letter to them Cirtfied, and hope they dont seek deficiency.

    Any thoughts?

  9. I’m in the same situation I have an 80/20 purchase money loan concieved on the same day but I hired a lawyer. I think that is what every one should do who is going through foreclosure. He basically told me the same thing. If both loans are purchase money concieved at the same time then the second lien holder has no recourse in California. Get a lawyer folks don’t try to do foreclose alone. The banks have lawyers who are trying to take everything you have. It’s common sense to protect yourself with a lawyer.

    • Mike, would you mind sharing the name of your lawyer. I’m a lawyer myself but feel like I need someone with some expertise in this area.

  10. I had a 2nd HELOC tied to the 1st which was obtained afterward. (1st and 2nd belong to the same Lender)

    The 1st mortgage HOLDER – NOT I, I didn’t live there eventually forclosed.

    I didn’t know about the foreclosure because I wasn’t on the 1st and the Bank didn’t notify me at all. When I found out about the foreclosure I inquired what was going to happen to me on the 2nd which the bank indicated in this case indicated I would not be effected because I wasn’t on the first.

    They never included the HELOC in the Foreclosure proceedings at all without my knowledge and hence sent me a letter that I would be charged off because of the foreclosure (Letter From Executives).

    They didn’t charge it off and never had me sign anything to keep the 2nd open and furthermore, sold the property and still left the HELOC active on the account.

    As to prevent any Lates on the 2nd I continued to pay until they resolved the Charge off which took another year to transpire.

    (Also note, the money received from the 2nd was disbursed to the 1st mortgage holder to prevent a foreclosue – to save my children from moving from me so I never received the money for the HELOC)

    I finally was able to have wamu CHARGE off the account – WITH NO DELQUENCIES on record which in California you can’t do unless 150 days passed. Furthermore, they sent me to immediate collections. On top of this, they noted the system that they performed the CHarge off RETROACTIVELY Based on the FOreclosure more than a year prior and are Failing to provide me a letter why they charged it off.

    I continued to pay to prevent Lates, as to try to also have this Removed from my Credit report etc.. later.

    ***********
    CCP 580D states, that if the Lender is both 1st and 2nd and they instigate the foreclosure of the 1st they have to seek judgement on the 2nd at that time. (Which they didn’t do.) They can seek no Deficiency judgement otherwise.

    Am I protected in this unique circumstance (From a Judgement).

    I am already fighting off Collector – with Validation which they never provided of my deliquencies and Am seeing if I am clear on the law here…

    Thanks

  11. In my case which is closer to scenario 2, I have a second mortgage with a private person, which is actually the seller of the property which is the object of the same second mortgage. The terms of the second mortgage makes the principal due and payable soon, because it was amortized for 15 years but due and payable in 3 years. I might not be able to meet payment of the principal. Can the second mortgage lender foreclose the property?

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