Mortgage Debt and Community Property
My spouse owns a California condo that we can't sell. If we allow a foreclosure, can the banks put a lien on a house I own?
My spouse bought a condo in January 2006, everything in my spouse's name, with a 80/20. We married in May 2006 and later turned the HELOC into a second mortgage loan to get a fixed rate but now has a balloon payment. The mortgage balance is greater than the property value, and we are planning to short sale it or allow foreclosure. I alone qualify to buy a bigger home with a conventional loan. We we don't want to do anything with the condo until we get the keys to the bigger home. Once we have the bigger home can the lender of primary and secondary loan go after my home that will be under my name only (i.e., puts a lien on the new home) if my spouse works out a short sale or allows foreclosure? We live in California.
- Ask your mortgagees if they participate in the MHA program.
- A short sale through HAFA appears to be your best solution.
- Mortgages are almost always deeds of trust in California.
You do not mention if you reside in the condo in question. You do not mention the source of the funds to pay the mortgage (which is usually a "deed of trust" in California) or HELOC are from community or separate property. These facts have an effect on how community property is analyzed, regardless of the name on the title. You do not mention if you have a anti-nuptial agreement, which could have implications on your case. For simplicity, I assume you live in the property and the mortgage payments come from community funds.
Your situation covers four issues:
- Short sales or deed in lieu of foreclosure
- Government programs for homeowners
- Home Equity Line of Credit
- California community property
The foreclosure process is expensive for all parties concerned, and the cumulative effect of many foreclosures can depress housing prices. To stabilize the housing market, the Obama administration created the Making Home Affordable (MHA) initiative. One program in MHA is Home Affordable Foreclosure Alternatives (HAFA). HAFA sets guidelines for short sales and deeds in lieu of foreclosure for distressed homeowners. If your servicer (the financial institution collecting your mortgage payments) participates in HAFA, then the servicer must follow HAFA's guidelines and deadlines. The guidelines provide financial incentives for both servicers and homeowners. The homeowner must also be eligible for the Home Affordable Modification Program (HAMP) as set forth by the program guidelines.
Home Equity Line of Credit
Home Equity Line of Credit (HELOC) is a loan, similar to revolving credit and secured by the property, where the lender agrees to loan a maximum amount of funds that the homeowner may use at his/her discretion. With a HELOC you only pay back what you spend, plus interest. The interest rate on HELOC is variable. Some HELOCs are convertible to a conventional loan with a fixed term, as in your case. The HELOC is considered a like a second mortgage and in a subordinate position to the first mortgage. Thus, if the property goes into foreclosure, then the HELOC will become an unsecured debt and the only alternative for the lender is to sue for a deficiency balance.
Community property is a marital property scheme used by nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In addition, Alaska allows married couples to choose either community property or equitable distribution when determining ownership of marital assets.
Generally speaking, if you live in a community property state, debts incurred during the marriage to benefit the community, such as credit cards used to purchase items that benefit both spouses, are considered community property, and are therefore owed by both spouses regardless of whether both spouses are listed on the credit card. This could include a home purchase if the source of the down payment and mortgage payments came from community property.
If a judgment were obtained against you, both you and your spouse's bank accounts could be levied to enforce the debt. However, even in community property states, many creditors do not go to the trouble of suing both spouses, as doing so tends to complicate the legal process involved in obtaining a judgment. For the benefit of readers reviewing this answer who live in community property states, community property schemes vary widely from state to state, so it is important to discuss your situation with an attorney in your state who is experienced with your states' community property laws.
California Community Property
California is a community property state, which means assets and obligations created by one spouse during the marriage become community assets and obligations. This means one spouse can be held liable for some debts of the other even if his or her name is not on the accounts that resulted in the debts.
In California, mortgages are almost always deeds of trust. Because "mortgage" is the term used most frequently when referring to a loan secured by a property, we use "mortgage" here when referring to a deed of trust even though it is inaccurate technically.
Under California law, a foreclosing lender cannot collect a deficiency balance if the mortgage was sourced from a purchase-money loan. Junior mortgages, home equity credit lines, and other loans secured by the property that were not used to purchase the property are not purchase-money loans. Non-purchase-money loans are not protected by California's anti-deficiency statute. A refinanced purchase-money mortgage loses its anti-deficiency protection.
Assuming your spouse has not refinanced the first mortgage, you will not need to worry about the first mortgage lender pursuing any deficiency balance if there is a foreclosure. Your spouse will likely be responsible for any deficiency balance on a second mortgage, home equity loans, or any other obligations secured by the property if they were non-purchase-money loans.
Regarding the HELOC, if your spouse allows a foreclosure and the home equity loan is not satisfied through the foreclosure sale, the HELOC will become an unsecured obligation. Assuming the deficiency balance is not paid, the home equity lender could pursue collection action against your spouse, including filing a lawsuit obtain a judgment for the balance of the debt. If the creditor obtains a judgment, it may be able to garnish your spouse's wages, levy your spouse's bank accounts, and place liens on any property your spouse owns. Because California is a community property state, your wages, bank accounts, and community property in your name is open to collections as well.
Research HAFA. Ask your mortgagees if they participate in the MHA program. If so, they must offer HAFA to you. A short sale through HAFA appears to be the best solution in your present situation because it frees your spouse of the property and will result in a minimal impact on your credit score. If your spouse is unable to do a short sale or deed in lieu of foreclosure (options that will not affect your credit score), your spouse may wish to let the property foreclose and suffer a decreased credit score. Then your spouse may wish to resolve the deficiency balance either through negotiating a settlement or through bankruptcy.
If you are able to purchase a property on your own credit, income, and down payment, then do so now before the old mortgagee contemplates suing you for the deficiency balance. As a resident in a community property state, your spouse will sign documents acknowledging your spouse's name will not appear on the title. Consult with a California attorney experienced in community property or real estate to understand the implications of the new home purchase and possible foreclosure on the old property.
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