do i have walking options?

[valleyj]

We like many are considering walking away. My wife and I both have excellent credit ratings in the high 700’s to low 800’s. I am currently way under water in my 3bd/1.5 bath home in Northern CA. Given all the research I’ve done we will be lucky to get back to $0 positive value in our house in 7-10 years. From a financial perspective it seems like we need to dump it one way or another. I'm looking for the best scenario.
Here are the stats:
Purchase price: $405k
Both loans are original to the purchase of the home:
1^st mortgage Aurora Financial Svcs. $324k, 10 year interest only (6 yrs remain) 5yr ARM
2^nd mortgage Citi Mortgage $79k, fixed
Current value: $200k maybe
I qualified and was granted this mortgage on my own, my name is the only one printed on the contract although written into the contract it says spouse must sign and she did. Second, we are both on title.
I am being laid off in a couple months. I called Aurora to let them know I was being laid off and to see what was available to me but didn’t get anywhere.
My wife is gainfully employed and can afford our current home on her own, but we don’t want to throw good money after bad. Also, she has available to her the opportunity to do her job out of another office 50 miles away in an area with much better schools and a lower cost of living.
We have qualified together for a loan to purchase a second home as primary before I knew I was being laid off. The loan assumes we both have our current salaries and we will be renting out the current home at market rate.
1.My wife can qualify on her own to purchase another home if the current mortgage expense doesn't fall to her and doesn’t affect her credit rating? Can I take her off title and will a short sale or foreclosure affect her credit? After moving could I let the house go without recourse since it is now a second home?
2.Is it reasonable to think we can go forward with the purchase under both of our names and if we can’t rent the house for market rate will I be able to let it go without recourse since again it will now be a second home?

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Thanks in advance for any advice.

[The Professor]

The determination of a loan's non-recourse characterization under CCP Section 580b is made at the time the loan is originated (in your case when you bought the home as your residence). Subsequent facts, like you renting it out, do not change its non-recourse characteristic. Hopefully that answers your second question.

As to the effect to your wife's credit in the event of a foreclosure or short sale, from what I'm reading she was an obligor on the loan (signed the promissory note). If that's the case, a breach or less than full payment of the loan will negatively impact her credit.

Daniel

[valleyj]

Thank you for your response Prof. Shays.

Are the terms non-recourse and purchase money synonymous? I spoke with an attorney very briefly today and the impression she gave me was in CA it would be very unlikely that an original loan in a home purchase was not a purchase money loan. This lead me to believe it would also mean it was non-recourse. Is this accurate?

[The Professor]

In California, purchase money loans that are "non-recourse" fall into two categories. They are as follows:

1. Vendor (seller) Financing. Irrespective of the nature of the real property (residential, commercial, raw land, etc.), where the seller provides all or part of the purchase financing by carrying back paper, if that loan is secured against the property that is purchased, it is "non-recourse."

2. Residence Purchase Financing. Loans for purchase of a personal residence (1-4 units) that will be borrower occupied and are secured against the residence are "non-recourse."

As your can see, not all secured loans that are created at the time of purchase are purchase money (investment property, raw land, etc.).

Daniel