Underwater 2nd Went To Collection - Does California One Action Rule Apply to Collectors?

[zelda]

Hello;

This forum has a wealth of great information..thank you for sharing the knowledge. I hope I am posting this in the correct place.

I haven't seen our specific situation addressed but I'm hoping someone has the factual answers to our questions:

Our home is a primary residence in CA with a first and second mortgage, neither of which are purchase money mortgages. Both loans are with different lenders.

Home Value $180,000. First mortgage balance slightly underwater at $190,500. (not underwater enough to default or walk away.)

First mortgage is in good standing, no lates, no delinquencies, no intention of short selling or defaulting on the first.

The objective is to keep the home and service the first mortgage as is.

Second mortgage balance of $135,000. Delinquent for 1 year. Second mortgage would not negotiate and the loan has now been charged off and either turned over or sold (not sure which) to a collection agency.

According to the California One Action Rule and the clause requiring the first action "to be against the security," my questions are these:

1. Does the collection agency have to abide by the same rules as the Second Mortgage lender with regard to the One Action Rule - meaning that their first course of action must be against the security/property rather than filing for a deficiency judgment in pursuit of asset or wage garnishment?

2. If the collection agency must abide by the One Action Rule, what is the recommended response, if any, to their first written notification that if we dispute or want evidence of the debt we must respond in writing within 30 days of receipt of the letter or they will deem the debt to be valid?


Our game plan is to keep the first mortgage current, keep the home, and try to negotiate removal of the lien for the second mortgage with the original lender - not a collection agency, between now and the end of the 4 year statute of limitations from the first date of breech, which was one year ago.

If we cannot come to a satisfactory agreement for release of lien between now and the end of the statute of limitations, we are resolved to be OK with the fact that we can never sell the home, and we will have a lien on the home for the amount of the second mortgage no matter what.

We are also OK with the fact that if the second mortgage lender wants to foreclose within the next 3 years, so be it. Our bet is that the future value of our home versus the declining balance on the first mortgage, is not going to be enough to make it worth their while to foreclose. If it does, we're OK with that too.

Our main concern right now is how to answer and stop in their tracks, the collection agency that more than likely bought the paper for a couple cents on the dollar.

If anyone has verbiage to use in a response to the collection agency it would be greatly appreciated along with any clarity regarding the questions posed above.

Thanks so much.

[davephx]

Idea for verification letter:

This letter is being sent to you in response to a notice sent to me dated xx/xx/xxxx and received on xx/xx/xxxx

Be advised that this is not a refusal to pay, but a notice sent pursuant to the Fair Debt Collection Practices Act, 15 USC 1692g Sec. 809 (b). requesting debt verification.

Please provide me with the following:

Evidence that I have a legal obligation to pay you including proof of the debt, how it was calculated, the name and address of the original creditor, and the original account number. Please also provide me with your license numbers and your Registered Agent to show that you are licensed to collect in my state.

Proof that you, the current collector, legally owns this debt or has legally been assigned this debt; meaning your agency is legally enabled to collect the debt in question from me.

A complete history of my payments beginning with my original creditor. This requirement is established by the case Fields v. Wilber Law Firm, Donald L. Wilber and Kenneth Wilber, USCA-02-C-0072, 7th Circuit Court, Sept 2004..

A signed copy of the original loan agreement.

I request that you cease all collection activity while you collect the aforementioned information.

If your offices are able to provide the proper documentation as requested, I will require at least 30 days to investigate this information and during such time all collection activity must cease and desist.

[davephx]

I wonder... if a collection agency bought the debt did they buy just the note or also did they buy the security interest.. not even sure if can separate.

It seems the 2nd has to foreclose first and then if it is recourse (not purchase money) go after you for any deficiency.

But if sued you hae to either make sure you raise the Civil Procedure Code Section 726 defense, or else seek sanctions against them for failing to comply with the California One-Action Rule. If you don’t raise the defense, you waive it and shoot yourself in the foot.

There are rare exceptions...

Even though California’s “one-action” rule applies to foreclosures, lenders can start both a judicial process and a nonjudicial power of sale process. This enables the lender to maintain the threat of a possible deficiency judgment against the borrower (if recourse).

Neither the commencement of a judicial foreclosure action, nor the filing of a notice of default which commences the nonjudicial foreclosure process, is considered an irrevocable election of remedies under the one-action rule. A lender is deemed to have elected its remedy, and had its one action, only when a judgment has been entered if a judicial foreclosure action is completed.

Also note there is a one-year redemption period if judicial foreclosure.

Very good discussion of this by a CA attorney at
California One Action Rule etc

[meggood]

Zelda--

Statute of limitations does not apply in this case. So if your plan banks on just making it through 4 years with 1st mortgage intact, you better figure on another plan. Land contracts are not bound by SOL in state of CA. I, too, made this error of thinking and was rightly corrected by members here who knew better.

The other plan is Tom Eason's strategy for settling your second. That is all you need.

Probably your loan was not actually SOLD to the collection agency. The CA is most likely just servicing the debt for a defined period of time for your original loan holder. So the bank most likely still owns the debt. My suspicion is that they let a CA harass you for 6-12 mos so they, the bank that has only your best interest at heart (wink wink) can keep their hands clean. A settlement can be worked out with them given time, if you remain <> underwater. REmember it costs them about $30K-50K to foreclose, so just add that on top of however much you are underwater.

Even if the CA DOES own the debt and lien, they are still bound by CA law and must abide by the one-action, security-first rule. That is why this is a worthless debt and the one who plays it cool will win out in the long run. Good luck!

All good things come to those who wait!

[meggood]

And many, many CA homeowner are in exactly the same boat as you with underwater recourse 1st and 2nds.

Check this thread and follow the beginning guidelines:


Strategy for Settling Your 2nd

[zelda]

To Davephx and Meggood -

Thank you so much for taking time to address my questions. And thanks also for the helpful links to further research. Your generosity is highly appreciated. I will use davephx's suggested response to the collection agency for my initial response...although, I'm wondering if it's a good idea to sound that "smart," right out of the gate.

[MAMASITA]

Hi ZELDA,
I am in the same situation as you. I have stopped paying my second with BOA. Have you considered Bankruptcy.
Chapter 7 will leave the second holding on to the lien and nothing else. If u dont plan on selling the house, its peace of mind. The second can not contact you, you can contact them thru your lawyer to negotiate. Chapter 13, is a replayment plan which allows you to keep the house while catching up with the payments. I am going to file bankruptcy once the second takes some drastic action otherwise I am banking my second mortage payments.
Am not an attorney, but have consulted so many of them. Bankruptcy consultations are free.