Not your usual CA purchase money HELOC - recourse?

[knownick]

I've lurked here for some time and want to extend a huge thank you to the knowledgeable people who take time out of their own days to answer these sorts of questions. Just knowing we're not alone eases some of the anxiety and fear.

My wife and I purchased our home in CA 1/2007 for $350k. 5% down and financed 80/15, both loans with Wells Fargo in my name only.

Current balance on first is 280k, second is 50k. Home is most likely worth ~250k.

Neither loan has been refinanced. I've been doing a lot of research on section 580(b) and it seems the situation with the first is cut and dry. There are intricacies with the second I have been unable to resolve.

Second was a "purchase money second" as listed on the loan docs taken out at the time of purchase. It is a HELOC, on which we took out a "fixed rate advance" of the entire available credit line, paid directly into the escrow account. After paying down the line for a year or so, we took out $1000 to pay off a high-rate credit card. The smaller balance is variable rate, billed separately, and even has a separate account number on my HELOC statements.

I'm wondering how that extra $1000 affects the recourse status of the second loan. Seems this is a gray area and there's not a lot of consensus at the moment. I plan on speaking to a lawyer about this shortly but am also interested in comments or suggestions from others that may have encountered a similar issue. I feel that the fact they are billed separately and kept as separate amounts on my statements could be a strong argument in favor of keeping the non-recourse status of the original draw.

I'm wondering if I should pay off the amount on the second draw to eliminate it from consideration entirely?

We have been attempting to work out a loan mod with WFB since September of last year and they have been unwilling to do anything for us. We're over 90 days late on both loans now and rapidly approaching the point where we both feel the best option for our family is to simply give them back the keys and start fresh.

Any insight is appreciated.

[sassafrass]

Your heloc sounds similar to mine. You can find my post (my 2nd in Ca a recourse loan?) on p.8 last oct. in these threads, and professor Shays reply.

[The Professor]

Thanks Sassafrass for responding. I won't be around this forum much for the next three weeks. A typical uptick in my workload with end of the semester grading. So as opportunities like this present themselves, I'd encourage people who have been on this forum for a while to help new participants find a potential answer to their question.

Take care,

Daniel

[knownick]

Originally Posted by sassafrass

Your heloc sounds similar to mine. You can find my post (my 2nd in Ca a recourse loan?) on p.8 last oct. in these threads, and professor Shays reply.

Thanks very much for the pointer, your thread was very helpful. Out of curiosity, did you ever speak to a lawyer and did they agree with the general sentiment that the original draw on the HELOC should remain non-recourse?

[arxca]

I would also appreciate any further insight anyone has on this. I have the same situation, with considerably more than $1k in question.

There are really two related questions here. For example:

1) Start with a $150k heloc (non-recourse purchase loan in CA). Pay down $50k. Later withdraw $50k. No withdrawal of gains - balance on loan never exceeds what was used for the original purchase. Does lender now have recourse on $50k? $0? The full $150k?

2) Start with same $150k heloc. Pay down $10k. Withdraw $10k. Repeat x5. Balance owed never drops below $140k, but total of $50k was drawn. Does lender have recourse on $10k? Or $50k?

[sassafrass]

Hi Knownick,
yes we have actually retained a lawyer and he does feel both our loans are non-recourse. The key things seemed to be that the entire balance was used for the purchase and that it was taken out at the time of purchase and that we had never refinanced.
Hope this helps!

[knownick]

I cold-called a lawyer today that I turned up in a google search - supposed to be one of "the best" foreclosure attorneys in the area... whatever that means.

He was not particularly helpful on the phone, nor particularly interested in setting up a consultation to actually look at my situation.

Based on our under five minute phone call, he told me our second is "definitely recourse" because we took money out. Amounts and details didn't matter.

He also wanted to know why we're not considering a short sale and then proceeded to strongly recommend that course of action.

Asked if he's actually seeing second lenders come after people for the full amount, his response was "absolutely".

So, that's frustrating. Seems he has an agenda though and prefers to make his money negotiating short sales.

I've got a referral request into the local bar association, but it seems their "next business day" response doesn't hold much water, as it's been almost a week now. Guess it's time to call and bug them again.

Sigh.

[knownick]

Originally Posted by knownick

I've got a referral request into the local bar association, but it seems their "next business day" response doesn't hold much water, as it's been almost a week now. Guess it's time to call and bug them again.

Well, the local Bar association doesn't do referrals for foreclosure related matters. Not that they could be bothered to get back to me and tell me that.

I can't be the only person going through this! It's so frustrating. Just finding people willing to answer your questions is an exercise in futility.

[Moe Bedard]

try.........


National Association of Consumer Advocates – Consumer Protection Advocates and Attorneys

[knownick]

***,

Thanks, they were one of the first places I looked at. Unfortunately, they have no lawyers listed within 3 counties of me. I have just contacted the referral service with the state bar instead of the county bar, and they appear to be much more responsive and helpful. Thanks for your assistance.

[sassafrass]

Thanks Knownick for all your postings. I for one totally understand about this nagging question about the heloc situation! For almost a year we have been tortured by that small amount of $ we borrowed back from our equity and the consequences it could have. Finally when we took our loan papers in to the attorney and he reviewed them it was more reassuring to us than we had actually expected. Doing that may help you too.
He also mentioned the fact of both loans being with the same lender and
a one action rule under ca law that may apply.

[knownick]

Thanks for the positive words.

The state bar referral service has set me up with a local attorney (they called back less than 2 minutes later!), and I have a meeting with them tomorrow. I'll be sure to post and let everyone know how it goes.

[knownick]

Well we met with a lawyer today and it was very helpful for putting our minds at ease.

She reviewed our closing documents, deed of trust, and statements from the second loan and felt that - at least to the extent of the initial draw - the loan was non-recourse. She didn't think that making a subsequent draw could change the purchase money characteristic of the original - especially since Wells Fargo was so nice and kept the balances separate for us under separate account numbers. That makes it very easy to demonstrate exactly what was used for purchase and what is owed through later transactions.

She was quite clear that they could come after us for the second draw (which has a balance of ~$800 now) but given the amount said that it would be pretty unlikely.

She suggested that if we wanted to eliminate that as a point of contention and it wasn't a financial hardship that we could pay off that $800 and remove it from consideration entirely. That's the route we're looking at now.

She also suggested looking into a short sale as a means of limiting the damage to our credit, because we can negotiate terms as part of the sale. That and the fact that Fannie/Freddie will insure a loan 2 years after a short sale as opposed to 5 after a foreclosure is tempting... but the thought of dealing with WFB to try and get a short sale through is daunting. They have been completely incompetent and unwilling to help up to this point - I have no reason to believe that they'd behave any differently with a short sale.

So that's where it leaves us. I hope this information helps somebody. Our next steps are to have my wife talk to a mortgage broker (our current loans are in my name only) to see if she could potentially qualify for a loan in the near-term on her own. If she could, that would make the decision to walk a lot easier.

Ironically we started getting calls from the second a few days ago to inform us of some "exciting new offers" we may qualify for - including interest rate reductions. Wow, how generous of you! Maybe if you had entertained that idea when we approached you a year ago it would have made a difference!

[sassafrass]

Hi Knownick,
Thats good news from your lawyer! Thanks for getting back after your meeting. Makes me feel a little better that both our lawyers seemed to feel the same about the second loan still being an original purchase money loan .
Yeah, we also considered whether we should pay the money back in from the draws, in our case 3 draws totaling $4,500 ,but lawyer
did'nt think necessary. They have the balance separated on what they refer to as a 'purchase plus line of credit statement?' separated with different interest rates, but with the same loan number. Guess they can call it what they want. It still remains a purchase money loan. Thats the good news.