2nd mortgage purchase money HELOC in CA

[FV1]

Greetings: I will be talking to some attorneys soon but like to get your thoughts first. Thank you.

Objective:

Review whether a foreclosure, deed in lieu of foreclosure, or a lender short sale acceptance would release my financial obligation on my second lien mortgage of a HELOC.


Background:

On February 22, 2005, I purchased my primary residence at in Sacramento for a price of $485,243. I provided a 10% down payment and a 90% financing with two loans.

The first trust deed with Home America Mortgage is a 3/1 ARM program for $388,194.
The second trust deed with Home America Mortgage is a HELOC program for $48,524.

Both loans were subsequently sold to Countrywide Home Loans

Around February 2006, I paid down my HELOC balance to $0 and requested a modification of rate adjustment and line increase to $85,000.

On March 1 2006, Countrywide approve my HELOC modification for rate adjustment and line increase to $85,000.

Between March 2006 to February 2007 and added home improvements for about $40,000 (landscaping, window dressing, house painting, crown molding trims, room addition, garage texturing and paint).

On March 2007 to present, I rented out my house due to a severe reduction of income.

On January 7, 2008, I drew $85,000 from the line to pay off the home improvement and other various debts.

I am currently struggling to keep up with the mortgage payments and discussing with the bank for a possible short sale. I would like to consider the financially obligation/liability in the event of a short sale, deed in lieu of foreclosure, or foreclosure.


Questions:

Is the currently modified HELOC still considered a non-recourse purchase money loan? What amount is non-recourse?

I do have tax-deferred retirement accounts and another property which has equity. Will the loss lender determine that I am still solvent and pursue my assets? What if I buy another home in the future? Will the loss lender pursue that asset?

[HHM]

It's unlikely the HELOC will be considered non-recourse (note: non-recourse debt is secured debt for which the borrower is not personally liable). HELOC's are tricky in this regard, since you opened the HELOC at the time of purchase, and you never mentioned whether CW (or the other lender) released the 2nd Trust Deed when you paid the HELOC to zero, odds are, you are personally liable for any deficiency balance on the HELOC.

Since both loans are with the same lender, you have a better than average shot at getting a short sale approved. But no one here can really say, you cannot force a short sale on the lender; the lender has to agree to accept less money than they are owed. If you do a short, there "may" be income tax consequences, since the forgiven part of the debt is treated as income by the IRS (see IRS Form 982 and the associated publication).

Same goes for the Deed in Lieu, the bank would have to accept the deed in lieu.

Of course, there is always foreclosure...but you will probably be liable for the deficiency.

[FV1]

Thanks for your reply.

I had read elsewhere online that in CA, if the HELOC was opened after purchase, it is a recourse loan. If the HELOC was opened at the time of purchased and used as purchase money loan, the it is a nonrecourse loan. However, I had the loan paid down (not paid off and closed), then modified for different rates with higher line limit. It is still the same loan account with the same number. I am wondering if the action of paying down to zero and then having it modified, void my condition as purchase money loan.

I will post feedback from a couple attorneys that I will talk to.

[HHM]

Ok, I did some checking (to check the peculiarities of CA law). You are correct, CA does have an anti-deficiency balance statute.

I "think" you will be ok...but you may need to prepare for a fight. If CW was so inclined, I could see them making the argument that by paying down the note to zero, modifying the terms, and the way you "used" the subsequent money from the HELOC, means the loan is no longer purchase money, and therefore would be a recourse note.

Here is the language in section 580(b) that I think hurts you...

...given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

Since the subsequent withdrawals were "not in fact" used to purchase, the HELOC is probably a recourse loan at this point.

[FV1]

Well, I talk to two attorney briefly. Neither could be sure without combing through the loan documents and then speculating on the action of paying down to zero and modifying the line.