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In the last 10 years millions of homeowners took out equity lines and second mortgages .  They used these loans to pay for college, spruce up the house, put in a pool or buy a boat.  The market was heading ever higher and few if any gave much thought to how these loans would play out in a foreclosure market like we have today. 

But, its time to think about them. 

In California the original (read--NOT refinanced) loans used to purchase your home are generally nonrecourse loans.  This means the lender does not have recourse--a claim--against you personally for the loan.  In other words, if you can not make the payments, you can walk away from the loan and the bank can only go after the property.  If the home is sold at foreclosure and there is not enough money to pay off all that you owe the bank, the bank can not come after you personally. 

But what about that equity line and what about that second mortgage?  Equity line loans are recourse loans--meaning the bank CAN come after you.  If you can't make the payment, do not assume you can just walk.  Second loans, like equity lines, are typically recourse loans--unless they were used to originally purchase the property. No walking here.

If the loan you have is a recourse loan, a short sale may be an option worth considering.  In a short sale you have the opportunity to negotiate away the recourse debt--so that after all is said and done, you no longer have personal liability for the loan...so you can put back on those boots and walk away.

Some have asked if its better to let the property go to foreclosure.  If there is an equity line involved or a second mortgage that was not part of the original purchase price, the answer may be no.  The equity line lender and second mortgage lender may start collection proceedings for any unsatisfied loan balance after the first lender forecloses. 

Determining the status of your loan (recourse or non-recourse) and the liabililty you may face after foreclosure or short sale requires professional evaluation. Even refinanced, first loans can be recourse loans--though if they are foreclosed up by a non-judicial proceeding (the overwhelmingly popular method in California), then you generally have no further liability for the first loan.  However, you may still be exposed on the equity line and recourse second mortgage.

If you would like to discuss your situation, please do not hesitate to call or email.

-m by email:  johnsonlaw@sbcglobal.net

This article is not for the purpose of giving legal advice.  It is for general, informational purposes only.  If you desire legal advice, please consult a real estate attorney.