When I started this blog, it was an added service for my clients, but I find that I am getting constant phone calls and emails from people who are not my clients. To be clear, I work with lenders (private money investors, mortgage pools) and do not engage in borrower or debtor work. 99% of these calls and emails I receive are from borrowers who want free legal advice. I don't work like that, but I do believe in giving time and general knowledge to my community. I thought the best way to deal with this was to just start posting some of the fact patterns and my responses.
It's not intended to be legal advice, but I hope it is sufficient general education for people who have an interest. Remember –
I am not your attorney, you are not my client and no attorney-client relationship has been formed by this general discussion.
Today's question (with details removed) from Reader R.B. –
"I have a 80/20 loan on a foreclose primary residence home in
Ok, RB – lots of wrong assumptions in this message that I am not sure even where to begin to correct. Obviously I do not have all the facts of your situation either and cannot provide a meaningful analysis. Also, I do not give tax advice, and you need a tax specialist for that.
That said, you should understand that if you have two loans, you have two lenders who could have foreclosed. If one lender foreclosed, so only one lender was “paid” by the foreclosure sale. That lender used the power of sale in the Deed of Trust (one of the two loan documents, listen to my DirtLaw Primer Podcast series for more explanation of your loan documents.) If the “sale price” at that foreclosure sale did not satisfy the loan amount, the law is still that the lender is deemed fully paid, and the deficiency is what you may receive a 1099 for.
However, the other lender is not paid and is still owed money. And, now there is no collateral for that bank to foreclose on. They are what we call a “sold-out second” or “sold-out junior lienholder.” Accordingly, that unpaid lender can sell the Promissory Note to a debt collection company. The collection agency can continue to pursue the debt on the unpaid loan.
There is no "deficiency" in this circumstance for the 2nd lender. There must be an actual sale to create the deficiency. Since the property was only sold once here, only that lender conducting the sale ended up with a deficiency between the value of the collateral and the amount of their loan. The 2nd lender ("sold-out junior lienholder") had no sale and no deficiency and therefore the borrower has no anti-deficiency defense or protection as to the sold-out second lender.
You should contact your local county bar association and ask for the Lawyer Referral Service for a
bankruptcy attorney or other real estate attorney to answer your questions.
Other assumptions – do not assume that the