I wanted to get this question out there while I do my own research on it. Maybe someone (esp. the Professor) knows the answer.
Is there any statute or case in California that prevents a sold-out second (junior) lienholder from forcing a foreclosure sale? I'm wondering if any sold-out seconds (perhaps bottom-feeder collection agencies who purchased the toxic debt) have resorted to threatening foreclosure in order to extort some monthly payment on the second. Granted, they wouldn't get anything out of the sale, but is there anything preventing them from trying this tactic?
Moreover, couldn't they also use this as a weapon on the first as well? In other words, if the first refuses to share some of the payment with the second, the second could force a foreclosure and the first would end up having to take a huge loss (presuming the house is substantially under water on the first too)?
I found the statement below on a blog and apparently this Certified Mortgage Planning Specialist believes that legislation is needed to prevent such an act; although, I don't know if I would go so far as to agree that it could be a threat to national security. It does pose an interesting issue though.
Preventing Junior lien holders from forcing forclosure
Submitted by lbelland from CA on Fri, 02/13/2009 - 11:33am.
Legislation needs to be passed barring junior lien holders from forcing foreclosure when the value of the subject property is less than what is owed to the senior lien holder. I want to emphasize that passing legislation barring a junior lien holder’s ability to force a foreclosure would not eliminate any of the subsequent remedies they already have by law. Because a foreclosure may wipe out a junior lien, it does not wipe out the junior lien holder’s rights to a deficiency judgment, in those states and circumstances that allow deficiency judgments. Consequently, if the foreclosure process has been started and it could be proved by a certified appraisal that the senior lien holder is accepting less than the principal balance owed, or the production of a certified payoff demand letter from the senior indicating the “net” they are to receive is below the principal balance, then any junior lien should not have the right to bar the foreclosure. It makes absolutely no sense to allow that to happen.
The junior position that investors took over the past 5 years, and to which Wall Street made very appealing and lucrative, was based on the assumption that appreciation would continue indefinitely. Most of the loans originated then were based on 100% financing in the form of an 80% 1st trust deed, and a 20% 2nd trust deed. Although perpetual appreciation was a naïve assumption it nevertheless brought in hundreds of billions of dollars from a global investment pool wanting to take part in the profits that the 2nd trust deeds promised. Based on the global credit crisis we are now experiencing I feel it would be reasonable to assume that there were no restrictions or investigation as to who those global investors ultimately were; and who are now making the decisions as to what they’ll accept as a payoff in our declining housing market.
For the most part lenders in the United States are servicers of loans; not holders of loans. Fannie Mae and Freddie Mac hold 56% of the nation’s loans and the balance are spread out throughout the world. The loans that Fannie/Freddie doesn’t own are the ones that are causing the problems in our neighborhoods. If you are an investment company in Singapore managing $20B in funds for Iran, and that money was invested in U.S. mortgage pools, would you have an interest in forcing the foreclosure if your investment has been reduced to zero? Could there be some benefit to a hostile government to force the foreclosure since their investment is being wiped out anyway?
Since 9/11 there can be no doubt that there are brain pools that exist that are working incessantly to undermine the United States. Who would have imagined the thought and engineering that went into the World Trade Center attack? Where they knew that flying those jets into those parts of the buildings would heat the superstructure to the point that it couldn’t support the weight above it and cause the whole building to collapse like an accordion while our fire fighters are running up to help those in the building get out? The thought devoted to that attack is almost beyond comprehension.
With that in mind would it be such a stretch of the imagination to think that what’s happening now, in every neighborhood in America, could be part of a contrived and insidious plan by a foreign country, hostile to America’s best interests, that would want to take advantage of a once in a generation global financial crisis to strike our country at the neighborhood level simply by saying “No.”?
It’s not just one lender that’s denying the amounts offered by the senior lien holders; they’re all doing it and inconsistently. The inconsistency can be attributed to the distribution of the loans across the hundreds of mortgage backed investment pools that were sold. We had a negotiator from Wells Fargo apologizing to us, knowing that what was being offered to the investor holding the junior lien made perfect sense but “They’re being so unreasonable.” …she was distraught. WAMU has been one of the worst offenders; but then they were one of the biggest originators of those types of loans. What kind of a savvy investor would prefer nothing over something? It doesn’t make sense unless there’s some perverse kind of “greater good” the investor is considering.
I pioneered the “Short sale” niche of the real estate industry 20 years ago and a junior lien holder every now and then would force the foreclosure, usually out of spite, thinking that they would have their rights preserved after foreclosure to pursue a deficiency judgment for the whole amount, and they would let the $1,000 to $5,000 being offered go for now. However, in California, and 12 other states deficiency judgments are not allowed for purchase money loans on owner occupied properties. So the money offered wasn’t so bad and was certainly better than nothing. Keep in mind that in 37 other states the investor could accept the offer and still have the right to pursue the deficiency. That’s why forcing the foreclosure doesn’t make sense to me; it defies logic.
Maybe I’m wrong; maybe the people who invested billions upon billions of dollars are just a bunch of dingbats that really don’t know what they’re doing. Whether they do or they don’t we’re one small shop, multiply what we’re experiencing by the tens of thousands of short sales out there, and you can see the size of the problem, and the locked up capital it represents. If just half of the “toxic” loans were cured by way of a short sale would we need the initial $750 billion dollar bailout, or the trillion dollar bailout in the making?
Regardless of who’s pulling the strings or why, passing legislation barring junior lien holders from preventing a short sale and forcing a foreclosure would be wildly beneficial to the heart of America. It would keep homes occupied, free up capital, curb the slide in property values and it wouldn’t cost the taxpayers, or anyone else, a dime. Considering the plight our country is now in there’s just no downside to that type of legislation.
Lawrence Belland, CMPS
Bernadette & Belland L.L.C.
"Brokering Fine Homes & Estates Since 1978"
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