Short Sale/Walk Away if it Doesn't Work Out

[dshelman]

Our sitch:
Transferring out of state after 19 years with company. Facility I work in is closing down and sending the work out of state. Wife will quit her job. House upside down by $130k (615k 1st, refi X 3 since '99). Made every payment like clock work until October. Legal firm engaged to work with CW in short sale activities, went 30days late in Oct.

Received "notice of intent to accelerate" from CW 2 days ago via registered letter. Already covered that particular letter in a recent post in this forum (Thanks Prof!). Looks like we have plenty of time for what we need to do. The legal firm advised us to not respond to CW's letter and let them deal with it. YAY!

We're in Aliso Viejo, CA, and have gotten a few offers on the short sale, and CW has acknowleged they're working with our representatives to get this done. The offers are pretty lowball, but we're early in the process.

Looking to move out of state to new job/location by mid-January. The out of state part has to do with where the work is, not with the housing issues, btw.

Now, we got this place in '99 and have refi'ed several times to pull money out and live high on the hog. From context of other postings, I guess that makes our loan a "recourse" loan?

What exactly does that mean? Does it mean they can comb through and take any other physical assets we have, like in a bankrupcy if they foreclose? What about if the short sale goes through?

Our firm told us that the Mortgage Relief Act of 2008 would protect us from tax liability both in California and Federally -- does this seem true?

Thanks in advance for anyone's responses,

D

[The Professor]

Am I accurate in assuming that you only have one loan on the property, and it is secured by a first deed of trust?

Daniel

[dshelman]

Yes, that is correct. One loan, first trust deed. Is that significant?

[The Professor]

Very significant and I believe you will find a great deal of relief in reading the rest of this post. The key benefit to you is that the lender will undoubtedly choose to follow the non-judicial foreclosure route as provided under California Civil Code Section 2924b. Why that benefits you is once they have proceeded to the point of crying the non-judicial foreclosure sale, they can no longer go after you personally for any deficiency judgment. In effect they have made what is commonly referred to as an election of remedies and under California Code of Civil Procedure Section 726 and can not chase you.

It has been my experience that only where you are dealing with a huge deficiency, and collection of that deficiency is almost a sure thing, will a lender utilize the court processes associated with a judicial foreclosure. The primary reason is judicial foreclosures typically take a great deal longer than non-judicial foreclosure, are costly to undertake, and the owner has a right of redemption which effectively makes the property unmarketable for up to a year.

So, even though your loan is recourse in nature because of the refinance, I wouldn't worry too much about it. As always I recommend that you talk to a lawyer skilled in real estate and debt collection matters and confirm that what I'm suggesting here fits your particular circumstances.

Take care,

Daniel

[dshelman]

Prof, thanks. Good news indeed and quite sensible. I will talk to my legal representation on this. They have told me when this is all said and done, there will be a debt settlement/paid in full recorded on my credit reports.

Now, the only thing to (eventually) concern oneself with is the tax implications. I know that the mortgage tax relief act of 2007 covers only those funds used to actually purchase or improve the house. Funds over and above that become taxable income. However, since the deficit is less than the purchase price, I was wondering if that counts as excused tax liability under the act.

Also, any idea if the state of California honors that act, or whether I'd be liable for state taxes regardless of the federal statute?

Thanks again! After reading your answer, I slept like a baby last night.

[The Professor]

As to the California position, best I think for me to direct you to a website. Go to: California’s mortgage forgiveness debt relief law

As to your other question on tax liability, I'm confident in my limited understanding of tax law (which never makes much logical sense) to avoid providing an answer.

Take care,

Daniel